What is the logic of giving stock dividends on a Mutual funds investment?

Question

one company here gave out 2% stock dividends based on the current number of shares of an investor. but once they give this additional shares the net asset value per shares (NAVPS) is expected to go down to balance out the value of the investment.

so if you will look at it, there will be more number of shares but the value of it in currency will still be the same because the worth of those shares went down to bring it to the same level. what then is the logic of this? do you believe that the company doing this has a hidden strategy? what do u think it is?

Answer 1

Mutual funds are required by law to distribute their gains when they sell underlying securities (i.e. the actual stocks they own).  Typically, at the end of a long bull market (like the end of 2007) mutual funds have big distributions in December.  In short, I do not think the company is trying to be secretive in any way.

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Answer 2

It is a way for the company to pay back some of their profits to investors without diluting the price of the stock. Many retired investors invest in stocks and mutual funds that pay dividends to supplement their income, hence making company stocks that do pay dividends very attractive to investors needing income.

Answer 3

Mutual funds are required by law to make periodic dividend and interest distributions.