Dividend Irrelevance Theory is a theory that a company’s dividend policy has no real effect on the value of the company.
A theory which explains that investors are not concerned with a company’s dividend policy since they can sell a portion of their portfolio of equities if they want cash.
The dividend irrelevance theory essentially indicates that an issuance of dividends should have little to no impact on stock price. One reason for paying or not paying dividends are the tax consequences. What a companies can do to minimise the ultimate tax bill (its own and shareholders’ combined) will vary with tax rules and its shareholder base (different types of shareholders, such as individuals and pension funds, face different tax rules). Although dividend irrelevance is not completely correct, it a good enough approximation to reality that fundmental valuation should usually ignore dividend policy. The signalling aspect of the more complete theory suggests that dividend yield is an important measure of management confidence, and therefore can be taken as an indicator of the stability of earnings.