Dividend irrelevance theory

Dividend irrelevance theory holds that, in perfect capital markets, a company's payout policy does not affect shareholder wealth, because investors can manufacture their own "homemade" dividends by selling shares.

ByHoang TruongUpdated July 11, 2026

What it is

See it move

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An investor holds 100 shares worth €50 each, or €5,000. If the company pays a €2 dividend, the price falls to about €48, leaving €4,800 of shares plus €200 cash, still €5,000. If it pays nothing, the investor can sell 4 shares at €50 to raise the same €200, leaving 96 shares worth €4,800 plus €200 cash — again €5,000.

The formula

LaTeX

n_{sell} = \frac{n_{held} \times D}{P}

Variables

$n_{se l l}$: Shares to sell to create the homemade dividend (shares)
$n_{h e l d}$: Shares currently held (shares)
$D$: Desired (hypothetical) dividend per share (€ per share)
$P$: Current share price (€ per share)

Gives the number of shares an investor must sell to replicate, on their own account, the cash a company-paid dividend of a given amount per share would have provided.