AbstractI investigate how a firm's total factor productivity (TFP) is related to its payout policy. I find that firms with higher TFP are more likely to pay dividends and repurchase shares. Such firms also pay higher dividends and repurchase more shares, even after controlling for income and other factors known to affect payout policy. Results are robust to propensity score matching and other analyses, including adoption of productivity‐enhancing technology. I find that firms with higher TFP earn higher future operating income; productive firms with higher agency concerns pay back more, thus draining resources that could potentially be misused.