The aim of the paper is to examine how dividend policy reduces the conflict of interest between the principal and the agent ie shareholders and the managers. The paper reviewed and evaluates the sources of conflict and the mechanism of mitigating against the agency problem. The study is based on review of previous studies to come up with a comprehensive conclusion as far as agency problems are concerned. It is found that dividend is an effective mechanism set up to take care of agency problem, so the shareholders will push for the payments of dividend when the firm has free cash flow in order to monitor the activities of the managers. Also, the board of directors is an effective device to control the agency problem only if it can prevent individual top managers, such as chief executive directors, from engaging in opportunistic behavior. It is recommended that shareholders should always be on alerts once there is free cash flow to the dividend to avoid allowing managers in pursuing their interests or investing in the non-profitable projects.