Interim Dividend: Meaning & Differences with Final Dividends

Dividends are an integral part of any company's financial strategy. They highlight the company's strong financial health and help build trust by showing its commitment to rewarding shareholders through profit sharing. Among the different types of dividends, interim dividends are unique due to their timing and purpose.

For shareholders, interim dividends serve as an early reward for their investment, reflecting the company's willingness to share profits. For the company, they demonstrate confidence in its ability to generate consistent profits while maintaining financial stability.

In this article, we will understand the interim dividends meaning, features, benefits, and how they are calculated. So let’s get started!

What is Interim Dividend?

Interim Dividend Meaning: An interim dividend is a type of dividend paid by a company to its shareholders during the financial year but before the end of the fiscal year. It represents a part of the profits shared with the shareholders by the company in the middle of the year. The amount to be paid as interim dividends is based on the company’s earnings up to that point.

The company often declares its interim dividends concurrently with the announcement of its interim financial reports, and are usually paid out quarterly or semi-annually. Unlike other dividends, interim dividends are approved solely by the board of directors and do not require shareholder approval.

How to Calculate Interim Dividend?

The Board of Directors of a company may declare an Interim Dividend during any financial year or at any time during the period from the closure of the financial year till the holding of the Annual General Meeting. 

This dividend is paid from the company’s current year profits, profits earned up to the previous quarter, or surplus profits from earlier years. Unlike a final dividend, which is declared once a year after financial results are finalized, an interim dividend can be announced multiple times in a year if the company’s financial position allows it.

Interim Dividend Example 

On 10th July 2018, the Board of Directors of ABC Limited intends to consider and declare an Interim Dividend for the following Financial Year (F.Y.): 

(i) 2017-18: Out of the profits earned in the F.Y. 2017-18

(ii) 2018-19: Out of the profits earned during the first quarter of F.Y. 2018- 19

Based on the earnings company's Board of Directors decides and declares interim dividend. By using the Dividend per share formula, we can calculate the interim dividend that is entitled per share.

Interim Dividend per share = ( Earnings of the Company * Dividend payout ratio / Number of Shares )

Features of Interim Dividend

• Interim dividends are usually paid in the middle of the financial year, allowing shareholders to access partial profits before the end of the year. 

• Interim Dividends are declared during the fiscal year, often in response to exceptional financial performance.

• Interim dividends are declared and approved solely by the company’s board of directors, without requiring any approval from the shareholders.

• Interim dividends are normally paid from retained earnings or accumulated profits after ensuring sufficient reserves for ongoing operations.

• The company is not legally bound to continue paying them in the future.

• Interim Dividends are normally expressed as per share basis or percentage of the face value of share. For example: Rs.10 per share or 20% of the face value of the share.

Benefits of Interim Dividend to the Company

• Financial Strength: Payment of interim dividends is commonly considered an expression of good financial performance and profitability of the firm.

• Surplus cash Management: Interim dividends help companies manage their surplus cash in a way that benefits shareholders rather than just sitting idle on the balance sheet.

• Attracts and Retain Shareholders: Dividends create a sense of reliability and trust, which encourages current shareholders to hold onto their shares while also drawing the interest of potential new investors. 

• Stock price stability: Declaring an interim dividend can help avoid stock price volatility due to the continued holding of interest among investors and an expression of management's positive confidence in future performance.

Benefits of Interim Dividend to Shareholders

• Passive Income: Shareholders will earn simply by holding a share, without doing anything or doing little through interim dividends making it one of the best passive income streams.

• Boosts Confidence: Interim Dividends signal the strong financial position of the company and its ability to maintain profitability, while also reassuring management’s commitment to creating value, thereby boosting shareholder confidence.

• Reinvestment Opportunities: Shareholders can reinvest the dividend through a Dividend Reinvestment Plan (DRIP) or by buying additional shares of the company, or elsewhere in the market, thus further capitalising on the reinvestment opportunities as they arise.
   

Disadvantages of Interim Dividend to the Company

• Cash Flow strain: When a company declares interim dividends it has to disburse cash to pay, thereby reducing cash reserves which might create cash flow strain on the company.

• Opportunity Cost: By paying interim dividends and effectively reducing cash surplus company may miss out on investment opportunities in the future that have the potential to provide higher returns.

• Risk of overestimating: Interim dividends are declared based on financial results from only part of the year, which might not represent the company’s full-year performance. If the company’s performance declines in later quarters, it could negatively impact its financial position and resources.

Disadvantages of Interim Dividend to the Shareholders

• Tax Implications: Dividends are taxable in the hands of shareholders, potentially increasing their tax liability.

• Irregular and Unreliable: Interim dividends are not guaranteed and may vary in frequency and amount, thus making it unreliable for shareholders to rely on them for consistent income.

• Opportunity Cost: Distributing cash as interim dividends reduces funds available for reinvestment in the business, potentially constraints the company's ability to pursue growth opportunities and achieve higher long-term returns for shareholders.

Difference Between Interim Dividend and Final Dividend

The main difference between Interim Dividend and Final Dividend is the timing. The interim dividend is declared and paid during the financial year based on interim profits and approved only by the Board of Directors. A final dividend is declared after the year-end, based on audited results, requiring shareholder approval.

Here are the points of difference between interim and final dividend:

Difference Between Proposed Dividend and Interim Dividend

A proposed dividend is simply a proposal by the board of directors to pay a dividend to shareholders which is subject to shareholders approval at the Annual General Meeting (AGM). In contrast, an interim dividend is a dividend that is declared and paid in the middle of the year based on the company's financial performance up to that point.

Tax Implications of Interim Dividend

• Taxable Income: Interim dividends are taxable in the hands of shareholders based on their applicable income tax rates. This means that shareholders have to include dividend income in their tax returns.

• Income Tax Rate: There is no separate tax rate for any dividends received by individuals. All incomes of the individual are clubbed and tax will be levied based on the tax slab he/she falls into. This means the tax on dividends is treated as part of the overall income and taxed accordingly.

Conclusion

Interim dividends provide a win-win opportunity for both companies and shareholders. For companies, they signify financial health and enhance investor trust. They deliver timely returns for shareholders, offering a blend of liquidity and confidence. However, prudent financial planning is essential, as interim dividends also carry potential risks, such as cash flow constraints. By carefully analysing a company’s financial stability and dividend history, investors can make informed decisions to maximize returns while safeguarding long-term growth.