How faith often trumps logic in dividend investing – and why it shouldn’t

One of the first theories university finance students learn is Modigliani-Miller irrelevance theory: the idea that a company’s dividend policy is largely irrelevant to investors because they can always generate cash flow from their shares by selling them.

In the real world, however, one of the first things you learn as a financial advisor is that despite this theory, investors love dividends. To be fair, the allure is easy to understand. I know I feel good when I get money handed to me with no effort on my part.

Does this mean that dividend irrelevance theory doesn’t hold up outside the ivory tower? Nope: Modigliani and Miller are right – and investors’ love of dividends is really just mental accounting at work.

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