Meaning of Interim Dividend
When a company pays dividends prior to the annual general meeting (AGM) of the company and the release of financial statements is known as an interim dividend. The company distributes the interim dividend in combination with the company’s interim financial statements. The payout happens either quarterly or semi-annually. The Board of Directors declares the interim dividend, and the company’s shareholders finally approve it.
The company declares and pays an interim dividend out of the profits of the financial year. To understand the concept better, let us take an example. On 10th July 2018, the Board of Directors of ABC Limited intends to consider and declare an interim dividend for the following Financial Year (FY):
Out of the profits earned in the FY 2017-18:
The Board may declare an interim dividend before approving financial statements for the FY 2017-18. If the board approves the financial statements, then the declaration of interim dividend for FY 2017-18 will not be possible.
Out of the profits earned during the first quarter of FY 2018-19:
The Board of Directors of a company may declare an interim dividend during any financial year or at any time during the period from the closure of the financial year till the holding of the Annual General Meeting. In the given example, if the Board approves the financial statements for FY 2017-18, then it is not possible to declare any Interim Dividend for FY 2017-18. However, in the given case, the Board may declare an Interim Dividend out of the profits earned during the first quarter of FY 2018-19.
How to Calculate Interim Dividend?
You can calculate dividends as a percentage of earnings and payout on a per-share basis.
The following is the formula for interim dividend:
(Earnings of the company* Dividend payout ratio)/ Number of shares.
For example, Company X Ltd. distributes 40% of its earnings to its shareholders. If they report earnings of Rs. 10 lakhs and have 20 lakhs shares outstanding, each share will get
(10,00,000*40%)/20,00,000 shares = Rs.0.2/ share dividend payout.
Interim Dividend vs Final Dividend
The following table summarizes the comparison between the interim and final dividend:
|Basis For Comparison||Interim Dividend||Final dividend|
|Meaning||It is the dividend which is declared during the accounting year, i.e. before the end of the financial year.||The dividend which is declared by the Board of Directors at the company’s Annual General Meeting, i.e. after the close of the financial year.|
|Announcement||The board of Directors of the company announces the interim dividend.||The board recommends final dividends at the Board meeting of the company and announces them during the AGM.|
|Revocation||With the consent of all shareholders.||Cannot be revoked in any circumstances.|
|Time of Declaration||Declared before financial year-end.||Declared after the end of the financial year|
|Rate of dividend||Lesser than the rate of the final dividend.||Always higher than the rate of interim dividends.|
|Articles of Association||Declared only when the articles expressly allow for it.||There is no need for a specific provision in the articles.|
Example of Interim Dividend:
Company A Ltd. declares a dividend on 10th November 2021 after releasing the second quarter and the half-yearly financial results. The company’s board of directors approves it at their meeting @ 10% of the face value (i.e., Rs. 5) of the company’s shares, which amounted to Rs. 0.50 per equity share.
Furthermore, the company fixes a dividend payment record date of 2nd December 2021. This means that only the company’s equity shareholders, as of 2nd December 2020, are eligible to receive this dividend.
Company A Ltd. declares this dividend in the middle of the fiscal year before preparing the final financial statements and the company’s Annual General Meeting.
Example of Final Dividend:
An investor owns 100 shares of Company ABC Limited, which declares a final dividend of Rs. 3.5 per share. The year-end dividend on the investor’s investment will be Rs. 350.
The company has now doubled the dividend for the coming year, paying Rs. 7 per share. As a result, the investor will receive Rs. 700 in year-end dividends on his 100 shares of the Company.
Frequently Asked Questions
An interim dividend is the distribution of earnings to shareholders before the end of the fiscal year. The following are the reasons:
1. To entice equity investors seeking income
2. When the scope of reinvestments is limited.
It is typically paid out before a company’s annual general meeting and the publication of its final financial statements.
Yes, the company can declare dividends more than once during the FY.
If a share’s face value is Rs. 50, an interim dividend of 10% means that the investors get Rs. 5 as a dividend per share.
The day the company reviews its records to determine its shareholders is the record date. To receive dividend payout you must be the shareholder as of that date. When the business mails the dividend to all record holders, that day is the payment date.
It is a one-time transfer of corporate assets to shareholders, typically in the form of cash. Most special dividends distributed to shareholders are more substantial than regular payouts and are associated with a specific occasion.
The ex dividend date determines which shareholders are eligible to get dividends on that particular date. It is the day that the company’s stock turns ex-dividend. It means that starting on that day, the stock does not have the value associated with its upcoming dividend payment.
An investor who purchases a stock on or after the ex-dividend date is not eligible for the dividend. Typically, the ex-dividend date for a stock is one business day before the record date. Whoever owns the stocks the day before the ex-dividend date receives the dividend payout.