What is Interim Dividend?
A dividend payment made before an organization’s annual general meeting and before the publication of its full financial results is known as an interim dividend. These announced dividends are often handed out monthly or quarterly along with the company’s interim financial report. The interim dividend is declared by the company’s board of directors, but shareholders must aultimately approve it.
Individuals make stock or bond investments in businesses. Bonds offer a fixed interest rate and give investors priority over shareholders in the event of bankruptcy, but investors do not gain from rising share prices. While some stocks do pay dividends, stocks do not pay interest. Shareholders who receive dividend payments can gain from increasing earnings through final and interim dividends as well as rising stock prices. An interim dividend is declared by the directors, but it requires shareholder approval. A regular dividend, also known as a final dividend, is, on the other hand, voted on and authorized at the annual general meeting after profits have been determined. Interim dividends and final dividends may be distributed as either cash or shares.
How to calculate Interim Dividend?
The interim dividend is often lower than the final payout when both the interim and final dividends are paid out during the same fiscal year. If the yearly earnings are less than anticipated, the Board of Directors may decide to maintain the interim dividend at a reduced rate to avoid it from hurting the company’s capacity to function.
An example to help understand better
Now that we have a better understanding of this idea, let’s look at an example of an interim dividend.
On November 18, 2020, The National Aluminium Company Limited, better known as NALCO, declared a dividend immediately after the release of the company’s second quarter (July-September) and semi-annual financial results. The company’s board of directors authorized the dividend distribution at a rate of 10% of the face value (Rs. 5) of the company’s shares, or Rs. 0.50 per equity share, during their meeting.
The business also established December 2, 2020, as the record date for the dividend distribution. This effectively indicates that the only shareholders who would be eligible to receive this dividend as of December 02, 2020, would be the equity shareholders of the corporation.
The case certainly qualifies as an interim dividend example because the dividend declaration from the National Aluminium Company Limited was issued during the fiscal year, before the creation of the final financial statements and the company’s Annual General Meeting.
Final Interim vs. Interim Dividend
Depending on the number of shares a shareholder owns, dividends are distributed. If, for instance, one owns 100 shares of company A and the firm pays out Rs 1 in dividends each year, they would earn Rs 100 in dividend income every year. Investors will receive Rs 2 per share if business A doubles its dividend, for an annual return of Rs 200. Each year, final dividends are announced and dispersed together with earnings. In contrast to the final dividends, which are paid out of current profits, interim dividends are paid out of retained earnings. After profits are compared against interim dividends, which are distributed before the release of the year’s final financial results, final dividends are declared. A company’s interim dividend can be announced by the management before the release of the annual results, at which point it will essentially become the final dividend.
Funding for Dividend
Since the final dividend is announced after the final financial accounts have been prepared and audited, the firm typically uses its current year’s net profit to pay the dividend.
When paying an interim dividend, the corporation often uses its cash reserves and retained earnings, which are made up of the earnings from prior fiscal years. Retained earnings do not include the profits from the current fiscal year because they are essentially the undistributed gains from prior years.