Imagine you have invested in shares of a company and suddenly, you receive a dividend from the very same company, even though the financial year hasn’t ended. You are pleasantly surprised but also curious.
This unexpected payout is what’s known as an ‘interim dividend’. Dividends play a crucial role in corporate finance, allowing companies to share a portion of their profits with shareholders.
In this article, we will explain what is interim dividend, the differences between interim dividends and final dividends, their benefits, and more.
What is Interim Dividend?
An interim dividend is a special type of dividend that a company distributes to its shareholders before the company’s Annual General Meeting (AGM) and the finalization of its annual accounts.
The company’s board of directors declares it and is usually given out when the company has made significant profits in the first half of the financial year. However, these dividends are usually smaller than the dividends paid at the end of the fiscal year.
The typical interim dividend amount is around 10% of shares held during the payout period.
However, some companies may also offer stock options or issue new shares as part of their interim dividends. These dividends can be used to analyze a firm’s performance and its financial health.
Interim Dividend vs. Final Dividend: Key Differences
Understanding the differences between interim and final dividends can help plan your online stock investing and make more informed decisions.
The following section contains all the differences between interim dividends and final dividends, including how they are declared when they are paid and what implications these disparities hold for you.
Interim dividends are declared by the board of directors, independent of the AGM. Final dividends are proposed by the board of directors but approved by stakeholders at the AGM.
A company would distribute interim dividends before the AGM while final dividends can only be distributed after the plan receives AGM approval and the finalization of accounts.
Final dividends are declared once a year whereas interim dividends can be declared multiple times. Bear in mind that declaration does not mean payout.
Dividends are calculated based on the profit. That’s true for both interim and final dividends. The thing is, interim dividends are calculated based on estimated profits. Final dividends are calculated based on actual profits.
Interim dividends and final dividends are legally binding and can not be revoked once declared. In exceptional circumstances, however, interim dividends are much easier to be revoked compared to final dividends.
|Factor||Interim Dividend||Final Dividend|
|Declaration||Board of directors||Proposed by directors, but approved at AGM|
|Timing||Before AGM||After finalization of annual accounts and AGM approval|
|Frequency||Declared more than once during the financial year||Declared only once per financial year|
|Calculation||Based on estimated profits for the year||Based on actual profits of the year|
|Revocability||Cannot be revoked||Cannot be revoked|
Benefits and Significance of Interim Dividend
The following section contains the reasons why companies distribute interim dividends and you as an investor can reap multiple benefits.
1. Indicator of Financial Health
A company that regularly pays interim dividends or dividends, in general, is often viewed as financially stable. It’s a positive signal to investors and can bolster the company’s reputation in the market.
2. Additional Returns for Shareholders
Interim dividends provide shareholders with an additional return on their investment. Investors can reap financial benefits earlier instead of waiting for the end of the financial year. This can be particularly beneficial for those who rely on dividend income or a dividend investing strategy, such as retirees.
3 Attracts More Investors
Who doesn’t wish for regular payouts? The prospect of interim dividends can make a company’s shares more attractive to potential investors which is a win-win for the company and investors.
4. Can Boost Share Prices
When a company announces an interim dividend, it often leads to an increase in the share price. This can result in capital gains for shareholders who choose to sell their shares.
How Do Companies Declare Interim Dividends?
The process of declaring interim dividends is interesting as shown below:
1. Profit Estimation
The company estimates its profits for the year. This is usually done after the first half of the financial year.
2. Decision by the Board of Directors
The company’s board of directors decides whether to distribute interim dividends based on the company’s financial health and business needs.
3. Calculation of Dividends
Dividends are usually calculated as a percentage of earnings and distributed on a per-share basis.
For example, if a company decides to distribute 20% of its earnings to its shareholders and it has 2 million shares outstanding, each shareholder will get a specific portion of the dividend payout based on the shares they hold.
4. Shareholder Approval
Although the board of directors approves the interim dividends, the final approval comes from the shareholders.
5. Payment of Dividends
Once approved, the dividends are paid to the shareholders either in cash, shares, or other assets.
Top Companies That Offer Interim Dividends in India
In India, several companies offer interim dividends. Here are a few of them:
- Vedanta: A global natural resources conglomerate, Vedanta declared an interim dividend of INR 18.50 in 2023.
- Coal India: As the world’s largest government-owned coal producer, Coal India declared an interim dividend of INR 5.25 in 2023.
- Power Finance Corporation: The financial backbone of the Indian power sector, this company declared an interim dividend of INR 3.50 in 2023.
- NTPC: India’s largest energy conglomerate, NTPC, declared an interim dividend of INR 4.25 in 2023.
- HCL Technologies: A leading IT services and consulting company, HCL Technologies declared an interim dividend of INR 18.00 in 2023.
Should You Invest in Companies with Interim Dividends?
Whether or not you should invest in interim dividend stocks depends on your choice, investment goals, and risk appetite.
Investing in stocks that offer interim dividends can be a potentially lucrative strategy if you’re seeking a consistent income flow and prefer stable large-cap companies.
These companies provide a regular source of passive income, demonstrate financial stability, and indicate confidence in their performance.
However, picking these stocks will depend entirely on your ability to analyze fundamentals, financials, and other factors related to not just one stock but multiple dividend stocks.
Not to forget, high dividends can sometimes indicate a company’s lack of opportunities for growth or reinvestment.
That is why it is best to examine financial health, growth possibilities, and dividend sustainability.
Interim dividends are payments made by companies to shareholders before the end of the financial year, providing them with a unique opportunity to receive additional returns.
Interim dividends offer the opportunity to receive returns earlier, enhance shareholder value, and indicate a company’s commitment to regular shareholder returns. However, before making an investment decision, consider other factors of a company and remember to conduct thorough research.
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Disclaimer: The stocks mentioned above are examples, not recommendations. Please do your own research before trading and investing in stocks and other financial securities.