In this article, Abhirup Raha pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses Interim Dividend and its Benefits.
Interim dividend refers to the dividend which is to be paid and announced before the company has issued its annual financial statements. The Board of Directors are responsible for making this declaration. The pronounced dividend usually contains the company’s interim financial statements. The interim dividends are actually paid out of undistributed profits brought forward from previous periods. There are companies who might follow the policy of paying dividends more than once in a year i.e. either quarterly or half-yearly, which is possible only when the company has adequate undistributed profits brought forward from previous periods. Therefore, the dividends which are announced in between two annual general meetings are termed as interim dividends.
The interim dividend is basically the smaller of the two payments paid to the shareholders. It refers to all the activities of the business which are less than a year old. Interim dividends are basically paid either quarterly or semi-annually. They are always accompanied interim statement which are published by the company. It is the Board of Directors who generally announce the interim dividend only when the company has retained enough earnings and is observing earnings which are higher than expected.
Breaking Down Interim Dividend
The two common ways by which an investor can invest in a company are either by bonds or stocks.
- Bonds, pay a set rate of interest and stocks do not pay any interest.
- Dividends allow the shareholders to benefit from the earnings of interim and final dividends. A normal or final dividend is voted on and approved at the annual general meeting once the earnings are disclosed. Hence both the interim and final dividend can be paid out in cash or stock.
- Final dividend is the dividend which is paid once the company has published the annual financial statements for the fiscal year.The rate of the interim dividend is generally lower than the rate of the final dividend.
- The Board of Directors must be conservative in disclosing the interim dividend of the company so that the company’s ability to pay the final dividend is not weakened. Some basic factors like growth prospects of the economy, sale orders in hand, seasonal factors and economic outlook affect the future profitability of the company. Hence, the Board of Directors should take considerable precautions while making decisions regarding the interim and final dividend.
Difference between Interim Dividend and Final Dividend
There are six differences between Interim Dividend and Final Dividend:
- The Board of Directors are responsible for declaring the interim dividend and the shareholders disclose the final dividend at the annual general meeting.
- An interim dividend is generally disclosed before the preparation of the final accounts on the other hand final dividend is disclosed only after the accounts are prepared and the profits are known.
- An interim dividend generally relates to any part of the year i.e. six months or three months, whereas final dividend relates to an entire year.
- The Board of directors can declare the Interim dividend only when expressly permitted by the AOA.
- An interim dividend never becomes a debt on the shareholders from the company once declared, whereas a final dividend becomes a debt once declared.
- The directors of the company have the power to cancel the declaration of the interim dividend once it is declared, whereas the shareholders do not.
Benefits of paying the Dividends
Payment of the dividends to the investors have an advantageous effect both on the investors and the company, namely:
- Preference of investors for dividends: Investors prefer a company which pays stable dividends. This ensures the investors have a reliable source of income even at times when the market price of the share falls. Hence, the investors have a special preference over companies who provide for dividends.
- Bird in hand fallacy: This theory suggests that the shareholders prefers stable dividends over the possibility of having any higher capital gains in the very future. Thus dividends play a significant role in luring the investors and shareholders out of their den.
- Stability: Investors prefer companies who have a good track record in paying dividends.Hence stability acts as an important factor for a proper evaluation of investment over the companies.
- Benefits without selling: The investors enjoy the monetary benefits without selling those stocks.
- Temporary excess cash: Investors choose that the company distributes the excess cash among the investors so that the investors can reinvest the money for further higher returns.
- Information signalling: When a company announces its dividend payments, it gives a strong signal about the future prospects of the company. During this time the companies can take advantage of the additional publicity they get during this time period.
Disadvantages of paying dividends
Paying dividends can also have certain demerits:
- Clientele effect: In a situation where a company is not able to pay dividends to its investors for a considerable amount of time, the company may lose their clients. The investors may even sell off their stocks over a short term.
- Decreased retained earnings: When a company pays dividends to its investors and shareholders, it decreases its retained earnings. If at this time the company falls short on cash, it may have adverse effects.
- Limits company’s growth: When a company pays dividends over a stable period of time, it results in limited growth of the company.
- Logistics: For a company to pay dividends, it requires a lot of record keeping on the company’s end.
Dividends, interim and final, need not be paid in cash. There are the non-cash dividends which are normally called by various names like the SCRIP Dividend Scheme or the dividend REINVESTMENT Plan. The main objective of these schemes is the issuance of new ordinary shares in lieu of the cash dividends.
In the ordinary course of a transaction, when we buy shares of any public listed companies we ought to understand the two terms used for any dividend declaration:
- EX-DIVIDEND: which means that the shares you are buying do not include any dividends.
- CUM-DIVIDEND: which means that the shares you are buying include the dividends which are going to be paid out on the due payment date.
For the ordinary shareholders, there is no fixed rate of dividend compared the others like the preference shareholders. For the preference shareholders both the interim dividend and the final dividend, both added together should not exceed the predetermined rate of dividends.
Hence, we can say that an Interim Dividend is a distribution that has been paid and declared by a company before determining its full-year earnings, to its shareholders. Such dividends are frequently distributed to the holders of a company’s common stock on either a quarterly or semi-annual basis.