Definition
The interim dividend is a dividend payment made by a corporation to the shareholders during accounting year. The payment for the interim dividend is made before the company’s financial statement and annual general meeting. On the other hand, the final dividend is announced after a company has released financial statement and approved the dividend in the annual general meeting.
Background
The finance required for a business to operate can be secured via debt and equity. Loan and corporate bonds are debt securities to be repaid within a particular duration at a certain interest rate. In comparison, stocks or shares are equity securities issued for the public to invest in. Debtors are eligible for a stable return on their investment in the form of interest, while the return for investors is uncertain and variable depending on the company’s performance.
Greater revenues for the firm would translate into higher profits for the shareholders, whereas the debtors would receive the same percentage of interest as agreed. On the other hand, if the company faces loss or liquidation, the shareholders might receive fewer to no assets. So, shareholders bear corporate liability at the expense of their whole investment in the firm.
Apart from profit and share appreciation, another relatively more stable income for shareholders is ‘dividends.’ Well-established companies usually periodically pay dividends as a percentage of profit.. However, smaller companies tend to invest back in the business, so they do not frequently pay out dividends. Dividends can be paid in the form of cash, shares, or assets from a firm’s earnings. There are three common types of dividends.
- Common/ Final Dividends
- Interim Dividends
- Special Dividends
This article is going to discuss interim dividends in detail.
Difference between Interim Dividend and Final Dividend
What is an Interim dividend?
Characteristics of interim dividend are as follows:
- An interim dividend is issued irregularly on a semi-annual basis, either monthly or quarterly.
- An interim dividend is issued before the Annual General Meeting (AGM) or between the two AGMs.
- An interim dividend is declared before the annual financial statements are out and the final earnings of the firm are determined.
- The percentage of interim dividend is decided based on unaudited interim financial statements. It is usually lower than the final dividend percentage because final earnings are unknown and risk is involved.
- The board of directors declares an interim dividend. Still, it is issued after the shareholders’ approval if the company has made good profits in the first half of the financial year.
- An interim dividend is funded from the retained earnings of the previous financial year of the firm.
- An interim dividend is risky and uncertain as it can get canceled if the company does not make adequate profits.
What is a Final dividend?
Characteristics of final dividend are as follows:
- A final dividend is issued regularly, on a fixed time, annually.
- A final dividend is issued after the Annual General Meeting (AGM) and the annual financial statements are released.
- The percentage of a final dividend is decided based on the firm’s final earnings and final financial statements. It is greater than the interim dividend.
- After discussions between the board members and stockholders, a final dividend is declared and issued.
- A final dividend is funded from the current earnings of the firm’s current financial year. However, the dividend can also be paid from retained earnings.
- A final dividend (announced) is legal and thus cannot get canceled under any circumstances. It’s because of the reason that once the final dividend is announced, it becomes a liability and right of shareholders.
How to calculate Interim Dividend?
Both interim and final dividends are calculated as a percentage of net earnings and distributed per-share. For example, a company’s earnings in the middle of the year equal to $90,000 and it declares 20% of it to be paid as interim dividends. The total number of shares is 5,000. The interim dividend can be paid as followings,
Interim dividend = amount of shares * percentage of dividend/number of shares
Interim dividend = (90,000 * 20%)/ 5,000 = $3.6 per share.
How are Interim Dividends distributed?
Dividends are usually paid from a company’s retained earnings. Retained earnings are the portion of a company’s profits set aside after all other business expenses and obligations are met. Two scenarios affect retained earnings; a profit or a loss to the company.
- The company makes a profit: If the company makes a profit in the first half or quarter of the financial year then the interim dividend can be paid from the profit of this year as well as from the retained earnings or accumulated profits of the previous year which have not been transferred to the fixed reserves.
- The company faces loss: If the company incurs a loss in the first half or quarter of the financial year then the interim dividend can be paid only from the retained earnings of the previous years which have not been transferred to the fixed reserves. The rate of this interim dividend should not be greater than the average of the rate of dividends issued in the past three financial years.
Conclusion
The company’s directors decide to grant interim dividends to their shareholders when the company’s income is fostering even though the financial year is several months until completion.
The management considers forecasting the upcoming cash flows a good time to oblige their investors without hurting the firm’s accumulated profits, as those can be replenished with the incoming profits.
The interim dividend is based on interim financial statements a final earnings of the firm are unknown. That’s why a low rate is chosen. This way, the company’s processes won’t get affected in case the final earnings come out to be less than anticipated earnings. Nevertheless, the expectations for future income can fluctuate due to unforeseen events. In that case, interim dividends might have to be canceled.
