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Why are stock dividends sometimes paid out even when funds could be better reinvested in the...

Why are stock dividends sometimes paid out even when funds could be better reinvested in the business, or when the firm must tap outside resources to pay the dividends?

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Answer #1

Constant dividend payout provides statibility to market price of the stock. Investor think that the company is stable and hence is paying stable dividends. Stable dividends have been shown to reduce volatility in stock prices. If the company does not have enough funds to pay dividends it borrows to pay dividends so as not to send any wrong signals. Sudden decrese in dividends leads to negative sentiments that the company may be in trouble, and the stock prices may plummet. This shall be detremental to the operations of the company too. Hence company may have a good investment opportunity, even then it will pay some constant dividend rather than send a wrong signal.

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