The interim dividends are derived from retained earnings, which are the company’s profits from the preceding fiscal years. Gains from the current year are not often paid out until the interim dividend is released. A company's distribution of an interim dividend is a sign of whether its full-year performance will live up to market expectations.
Investors who need money but want to keep their high-dividend equities can benefit from interim dividends. Even though delivering interim dividends covers half or less of an average annual payout, they can nonetheless fill in any gaps before regular payments start by offering some cash. This article explains the interim dividend meaning.
What is the interim dividend?
The dividend payment made before a company’s Annual General Meeting (AGM) is known as the "interim dividend." It is a dividend given out by a company to its shareholders. Ideally, shareholders receive interim dividends twice a year.
The final dividend comes from current earnings, whereas the interim comes from retained earnings. The board of directors is responsible for declaring interim dividends.
Calculation of interim dividend
The board of directors announces the interim dividend and final dividend. If they release both in the same financial year, then the interim dividend will be less than the final dividend.
If the annual results are less impressive than anticipated, the Board of Directors can lower the interim dividend to ensure the company's operations are financially smooth.
How is the interim dividend funded?
The profits from the prior fiscal years are a part of retained earnings, from which interim dividends are paid. However, since the profits from the current year won't be fully realised when the interim dividend is declared, it is typically not paid from those profits.
Final versus interim dividends
Dividends are a part of the returns a shareholder draws yearly or twice a year. Here is an illustration to explain how an interim dividend works.
Suppose you have 100 shares of Company L. You are liable to get Rs. 1 per share. So by the end of the year, you will get Rs. 100 as a dividend. If the dividends increase, and the company announces that the shareholders will get the original dividend thrice, then by the end of the year, you can earn Rs. 300.
Final dividends are only announced annually or half-yearly. They are declared along with the earnings of the financial year. The final dividend comes from the current earnings. However, the interim dividend is part of the interim earnings or retained earnings that are not current. These are distributed when the company has made good profits, and they want to share them with the shareholders too.
The final dividend is the fixed dividend that is distributed every year. It can be announced quarterly, bi-yearly, or even yearly. The dividend comes out of current earnings. It could be the surplus amount of earnings left after the capital expenditures, and working capital is taken out.
The strategy behind interim or final dividends completely depends upon the company's management and its intentions toward the shareholders.