This paper seeks to explain the choice of payment method in mergers and acquisitions using the dividend clientele hypothesis. We hypothesize that, at the margin, the method of payment is more likely to be stock if the dividend policies of the two firms involved in a merger or acquisition are quite similar, but more likely to be cash if the dividend policies are much different. The empirical data support the relevance of the dividend clientele hypothesis for the method of payment in mergers and acquisitions. We also find that in stock-based deals a difference in dividend policies is negatively correlated with target announcement returns.