Dividend Puzzle

The dividend puzzle refers to the perplexing question of why companies continue to pay dividends even though, from a financial theory perspective, they might not be the most efficient way to return capital to shareholders. According to the Modigliani-Miller theorem, in a perfect market, dividends should be irrelevant, as shareholders can sell shares to generate cash flow instead. However, in reality, many investors prefer companies that pay dividends, viewing them as a sign of financial stability and reliability. The "puzzle" lies in the contradiction between theoretical models and actual investor behavior, where dividends remain popular despite their inefficiencies.

Example

Despite the theoretical argument that dividends should be irrelevant, many blue-chip companies maintain regular dividend payments to satisfy investor expectations.