Why does a company pay Interim Dividend: All you need to know

What is a Dividend?

A dividend is a reward that a company distributes among its shareholders, whether it be cash or some other reward. Dividends may be distributed in a number of ways, including stock dividends, cash payments, and other forms. The board of directors of a firm determines its dividend, which requires shareholder approval. Although, a  company is not compelled to pay dividends. A dividend is often a portion of the company's profit that is distributed to its shareholders.

What is an Interim Dividend?

A dividend payment made before an organization's annual general meeting (AGM) and the publication of its complete financial statements is known as an interim dividend. Normally, the interim financial results of the corporation are presented along with it when an interim dividend is declared. Out of interim and final dividend payouts made to the shareholders, the interim dividend is generally the lesser of the two. 

An interim dividend means a dividend paid on a recurring basis before the publishing of the financial statements for the entire fiscal period. Depending on how frequently financial statements are released, they may be paid quarterly or annually. Interim dividends paid are less from dividends paid out after the end of the entire financial year in terms of the amount paid. These large payouts typically take place once every three months during an earnings report known as dividend day.

Around 10% of shares owned during any given payout period is the most typical amount for interim dividends. Interim dividends could also include bonuses given via stock options or new shares issued by certain corporations; this is because companies don't keep all of their cash reserves in assets that are easily convertible such as stocks listed on the stock market. 

Understanding an Interim Dividend

Interim dividends are paid from retained earnings, which include the profits of the previous financial years. It is usually not paid out of current years' profits as the same will not be fully realized when the interim dividend is declared. A company's payment of the interim dividend is considered as a leading sign of whether or not its full-year earnings will reach analyst estimates. 

Investors who want to stick to high-dividend equities but need cash on hand for other expenses may benefit from interim dividends. Even though payment of interim dividends results in only covering half or less of an average yearly dividend, they can nonetheless provide some income to assist cover any gaps before regular payments resume. Depending on the market and other considerations, these payments can go monthly or quarterly and vary from firm to company.

Retained earnings, which include the profits from previous financial years, are used to pay interim dividends. Since the gains from the current year won't be completely realized when the interim dividend is declared, it is typically not paid from those profits.

There are two types of interim dividends: cash and shares. Cash distributions are monetary payments made to shareholders without reducing the value of the equity ownership shares already owned by existing owners. It is equivalent to receiving Rs. 10 right away for every Rs. 100 in stocks. Since a firm doesn't have enough capital to provide an equal amount to each shareholder, stock dividends result in the dilution of the equity stake behind each share.

Interim Dividend vs Final Dividend

Dividends are paid out on the basis of the number of shares owned. One will receive Rs. 100 in dividend income a year if, for instance, they own 100 shares of company A and the business pays out Rs 1 in dividends each year. If company A doubles its dividend, it will distribute Rs 2 per share, giving investors a yearly return of Rs 200. Final dividends are declared and distributed yearly together with earnings. Companies pay interim dividends from retained earnings rather than current earnings as in the case of the final dividends. Final dividends are announced once earnings are calculated against interim dividends, which are paid before the release of the final financial statements for the year. The interim dividend of a company can be declared by the management before publishing the annual results after which it would effectively be the final dividend.

A final or regular dividend is a specified sum that is distributed on a quarterly, half-yearly, or yearly basis. It could represent a percentage of earnings or net income. It can also be paid from the earnings that remain after the business pays for working capital and capital expenditures (CapEx). The management's objectives and intentions for shareholders will determine the dividend policy or strategy that is employed. The approach for interim dividends can be the same as for final dividends, but because interim dividends are paid before the end of the fiscal year, their financial statements are not audited.