Dividend Irrelevance Theory

Theory doesn’t always align with reality...which is why we call theories “theories.” That’s the case for dividend irrelevance theory fo sho.

Dividend irrelevance theory says that, in theory, a company’s dividend policy shouldn’t affect a company’s stock price/value at all, since investors can respond to what’s happening with dividends (going up or down) accordingly. These two guys argued that shareholders aren’t, like, “locked in.” For instance, if dividends go up, investors can just reinvest that money, and if dividends go down, investors can just sell some of their shares, using that money elsewhere to get the money they planned on getting from the dividend.

Basically, they argue that dividends don’t add value, because investors can put that money elsewhere...where it’d also be making money.

Yet, there have been a lot of super-academic studies on this, and they show that dividends do indeed increase the price of stocks, especially for high-end blue chip stocks. So...it seems like dividends are perceived by investors as icing on top, even though they could get their icing elsewhere with that same money...in theory.