Lavish Rates Not Enough to Guarantee Growth

If you’re thinking about raising dividend rates to jump-start share growth, 2005’s experience shows that higher rates are not a reliable magic bullet.


Conventional wisdom says that dividend rates can be like the handle on a spigot—turn it far enough in one direction and shares will flow in. A credit union that took that approach might find the results disappointing, however.

To estimate the relationship between dividend rates and share growth, we looked at calendar year 2005 share growth and cost of funds for more than 1,200 credit unions with assets above $100 million.* We then plotted share growth against the cost of funds for each of the credit unions in the data set, and were surprised by the results:

Credit unions paying above-median dividends were slightly more likely to post above-median share growth. The converse was also true. Yet as you can see from the lack of a plotting pattern, the relationship between the dividend rate and share growth was completely random on an aggregate basis—there was no statistically significant relationship between the two variables. In fact, a number of credit unions paying relatively rich dividends saw shares contract, and other credit unions with slim dividends experienced double-digit growth.

This data suggests that short-term member behavior is not dependably influenced by pricing decisions. Coupled with recent changes in consumer circumstances—outspending income, a preference for building wealth through real estate, and higher gas prices taking a bigger bite out of the family budget—it may be some time before the share growth trend turns.

*To refine the data set, we sorted the credit unions by annual share growth and excluded the top and bottom 5% to eliminate credit unions with extraordinary circumstances, such as inorganic share growth due to mergers or weak performance due to sponsor layoffs, for example.




May 1, 2006


  • This study would probably be much more powerful if was conducted at the individual product level. Currently CD rates are at 4.0%+ and core deposits are 1% or lower so the mix has a large influence. Do you have the data by product?
  • Good article but let's realize that the tendency to have higher rates impact savings growth may have much more impact in a higher rate environment where the member sees and experiences a greater total return. The issue of earning 5% vs 3% has greater impact.
  • But what was the main reason for growth?