Meaning of Interim Dividends

What is Interim Dividends?

Many investors choose to invest in the stock market using either a growth or dividend investing strategy. Dividend investing is a way to make steady income from dividends by investing in stable, profitable companies that have been around for a long time.

Investors who are considering this approach should be familiar with the concept of interim dividend. Also, the differences between final dividend and interim dividend.

What's a dividend?

Let's start by briefly understanding the concept of interim dividend before we can understand its meaning. The equity investors of a company can be considered its owners. They are considered to be the owners of the company and have automatic rights to any profits.

The company also distributes its profits to equity shareholders periodically via cash dividends. While cash dividends are more common, they are not the only way to distribute dividends. Many companies pay dividends to equity shareholders in the form of shares being given instead of cash. Stock dividends are dividends paid in stock.

When do dividends go out to shareholders?

A company usually holds an annual shareholders meeting in the form of an Annual general Meeting (AGM). The company presents to its equity shareholders the audited financial statements for the previous financial year. The company proposes a dividend rate that will be paid to shareholders. This is also presented for approval.

After receiving shareholder approval, the company distributes the dividends to its equity shareholders. The company proposes the final dividend at its AGM, after which the final financial statements have been prepared and audited.

What does interim dividend mean?

Let's now look at the interim dividend.

An interim dividend is a payment made by a company before the Annual General Meeting (AGM) takes place. Before the preparation of final financial statements, interim dividends are presented to shareholders and distributed to them.

Final dividends are paid once only, but interim dividends may be paid at any time during the financial year. Most companies prefer to distribute these dividends quarterly or semiannually, along with the release or semi-annual accounts.

Because interim dividends are often issued more often to equity shareholders, they almost always have a lower rate than the final dividend. This is a key point to remember. As you have seen, interim dividends do not need to be paid out in cash. Many companies issue stock dividends rather than cash dividends.

An example of an interim dividend

To better understand the concept, let's take a look at an example of interim dividend.

NALCO (National Aluminium Company Limited) announced a dividend on November 18, 2019, shortly after publishing the semi-annual financial results and the second quarter (July-September) of the company. In their meeting, the company's board approved the payment of the dividend at 10% of its face value (Rs. 5 of the shares in the company, which was Rs. 0.50 equity share

The record date for the payment of dividends was also set by the company at December 02, 2020. This means that the dividend would only be available to the equity shareholders as of December 02, 2020.

The situation is clearly an example of an interim dividend because it was declared by the National Aluminium Company Limited in the middle year of the financial year prior to the preparation of final financial statements.

How does the interim dividend differ from the final dividend?

The gap between interim and final dividends is much greater than was disclosed by the company. Let's look at the differences.

Declaration of and approval for the dividend:

The board of directors does not propose the idea for the final dividend. The issue is considered by the shareholders, who vote on it, and then approve the payment of the final dividend.

The board of directors is responsible for declaring, voting on and authorizing the payment of interim dividends. The shareholders have the right to refuse payment of interim dividend and overturn the decision made by the board.

Financing of the Dividend:

The company usually draws from its current year net profits to fund the dividend payout since the final dividend is declared following the audit and preparation of the financial statements.

The company will usually use its cash reserves to pay interim dividends. This includes profits from previous financial years. Retained earnings do not include current year profits as they are the undistributed profits from the previous years.

Conclusion

You've learned everything you can about interim dividends. Here's another thing to remember. A company's interim dividends are almost always paid with a final payout.

In cases where the company pays both interim and final dividends the final dividend rate tends to be lower than that of a company which only pays a final dividend.