This article investigates the controversy surrounding the effect of dividend yields on common stock returns and is particularly timely as the Bush administration is proposing to eliminate corporate dividends from income taxation. Australia's Imputation Scheme of 1986 offers an ideal controlled setting for assessing such effects: The country's dividend tax imputation created an atmosphere in which dividends are tax-preferred over net income transferred to retained earnings on the balance sheet. Dividend-per-share and the payout ratio have increased, on average, post-imputation. In addition, the cumulative abnormal returns (CAR) show that the tax changes affected high-dividend and low-dividend stocks differently pre- and post- imputation. Some implications regarding the stock market anticipation of tax law changes and government policies are given.