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Absolutely! In a Leveraged Buyout (LBO) model, you can certainly incorporate dividend payments when calculating the Internal Rate of Return (IRR). Here's how it works:
When you're setting up your LBO model, you'll have a line item for dividends in your cash flow statement. This will represent any cash distributions made to the equity holders (i.e., the private equity firm and its investors in this case).
These dividend payments will reduce the available cash flow, which in turn affects the amount of debt that can be repaid in any given year.
When calculating the IRR, you'll take into account not just the initial equity investment and the final exit proceeds, but also any interim cash flows - which would include these dividend payments.
So, if a dividend is paid out in a particular year, this would increase the cash flow for that year, which would in turn increase the IRR, all else being equal.
Remember, the IRR is essentially the discount rate that makes the Net Present Value (NPV) of all cash flows (including the initial investment, any interim cash flows, and the final exit proceeds) equal to zero. So any cash inflows, such as dividends, will indeed impact the IRR.
Just keep in mind that in a typical LBO scenario, most of the returns are usually generated from the final sale or exit rather than interim cash flows like dividends. But that doesn't mean you can't or shouldn't include them in your model!
Sources: LBOs - Why repay debt instead of keeping cash flow?, Why wouldn't a fund do a leveraged buyout of an undervalued REIT?, Paper LBO Model for SA interviews?, Corp Dev LBO returns question: Levered and Unlevered IRR
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