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

See it move

Loading infographic...

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.

Where it fits

SubjectCorporate FinanceAdvancedTopicDividend Policy & PayoutAdvanced

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.