Interim dividends are company dividends declared before the annual general meeting (AGM) and publication of the financial statements for the financial year. Such dividend payments are common in countries such as the United Kingdom and the United States.
In this article, we will expressly answer the following questions: ‘What is interim dividend?’ and discuss how it influences shareholder returns.
Table of Contents
Key Features of Interim Dividends
Key Takeaways:
- Dividend distribution is carried out based on the recommendation of the board of directors. Additionally, shareholder approval is required.
- This type of dividend is typically paid out from retained earnings of previous years.
- The payment frequency can vary. For example, dividend distribution in the United Kingdom is typically conducted on a semi-annual basis. In the United States, however, most companies make dividend declarations quarterly.
Understanding Dividends in General
A dividend payout is a reward for an equity investment. Companies have two methods of capital raising: borrowing and selling ownership shares. In the former case, investors receive fixed interest payments. In the latter case, they receive a portion of the company’s profits.
Shareholders earn income from business growth and share price appreciation, as well as through dividends. Dividends are a way to increase investment return and make investments more attractive when comparing debt versus equity.
Dividends are paid on a per-share basis. Cash dividends are sourced from the company’s net profit. Unlike bond interest, dividends are an unguaranteed source of income because their payout depends on special provision such as a company’s financial stability and cash reserves.
Note: An interim dividend payment enables a company to have a part of its profits distributed before the end of the fiscal year.
Types of Dividends
There are other dividend types. The following can be distinguished based on timing:
- final dividend – a reward paid to shareholders at the end of the financial year based on the company’s financial results;
- special dividend – a distribution made in the event of receiving a large one-off profit, business reorganisation, or other extraordinary event.
In terms of the type of dividend, there are two main categories: cash dividends and stock dividends. Additionally, the company’s board of directors may recommend a hybrid form: a scrip dividend. If a company declares such a payment, investors can choose to receive either cash or shares. Other liquid assets, such as stock options, are used even less frequently.
Another type is the preferred dividend. This is a cash payment received by holders of preferred shares. Unlike regular dividends, the amount of a preferred dividend is always fixed.
How Interim Dividends Are Calculated
To make an initial dividend calculation, an investor needs to multiply the dividend payout ratio by earnings per share. The dividend payment amount can also be calculated using the dividend formula:
Earnings Forecast × Dividend Payout Ratio / Number of Shares Outstanding
It is important to note that companies often adopt a conservative dividend payout ratio for such dividends due to uncertainty surrounding annual financial results. For example:
- company N is expected to earn $1 million in the first half of the year;
- its characteristic interim dividend payout ratio is 20%;
- the total number of shares outstanding is 100,000.
The expected shareholder reward for six months will then be $2 (1,000,000 × 0.2 / 100,000). Alternatively, earnings per share can be calculated as $10. Multiplying this by the payout ratio gives a dividend of $2 per share.
Differences Between Interim and Final Dividends
The table below shows a comparison of interim vs final dividend.
| Interim | Final | |
| Declaration timing | In the current financial year | Following the publication of the financial year reporting |
| Calculation basis | Current year profits indicated in unaudited interim financial statements | Final audited financial results |
| Revocation rules | Can be revoked by the board of directors | Cannot be revoked |
| Dividend rates | Usually lower | Usually higher, especially if two payments are made in the same fiscal year |
The revocation rules may differ depending on the country in which the company operates. In the United Kingdom, India and other countries, the interim dividend funded at lower rates is common. In contrast, many companies in the United States pay the same amounts each quarter.
The most important aspect of the dividend comparison is current earnings vs. retained earnings. Retained earnings from previous fiscal years are often used for interim shareholder rewards. Current earnings are typically used for final dividends.
In some countries, the company’s management determines the interim dividend solely. In others, however, shareholder approval is required.
H2: Benefits of Interim Dividends
To definitively answer the question ‘What’re interim dividends?’, let’s consider the main advantages. From the company’s perspective, such payments enhance the investment attractiveness of the business.
From the market’s perspective, an interim dividend means profit that increases shareholder returns. This boosts investor confidence and their belief in the company’s stability.
Regular dividend income, whether semi-annual, quarterly or monthly, simplifies cash flow management. Therefore, such stocks are more appealing to those seeking passive income.
Real-Life Examples of Interim Dividends
As a dividend example from a publicly traded company, consider the payments made by Home Depot Inc. (HD). For the first to third quarters of 2024, the company paid $2.25 per share. In the fourth quarter, it paid $2.30 per share. The dividend yield was 2.52%.
Another interim dividend example is that of the Australian company Plato Income Maximiser Ltd (PL8). Its corporate dividend policy requires monthly dividend announcements. The company’s shares are popular among retirees. The management aims to make regular and sustainable dividend payments in order to maintain market confidence.
Eligibility for Interim Dividends
In order to receive interim or final dividends, you must be a shareholder on the record date. This is the day on which the company carries out shareholder registration. Investors who are on the register on this date will be eligible for the upcoming dividend distribution.
Dividend eligibility is granted by purchasing the stock before the ex-dividend date. Conversely, selling the stock before this date means the investor will miss out on the upcoming dividend.
Note: Since all global stock exchanges have adopted T+1 trading, the ex-dividend date and the record date now fall on the same business day.
Conclusion and Investor Considerations
Investors seeking capital growth can use an interim dividend as an indicator of a company’s performance. This is one of the factors that can help to forecast yearly earnings. This is particularly important if the company pays inconsistent dividends.
In an income strategy, dividend stocks that provide regular cash flow are advantageous. This offers novice investors an opportunity to increase their profits through reinvestment. For individuals who already rely on passive income, more frequent payments can simplify financial planning.
However, dividend investing should not be solely focused on maximizing current earnings. When making investment decisions, it is important to consider a company’s financial situation and growth prospects, as well as the likelihood of increased future payouts.
FAQ
What is meant by interim dividends?
Interim dividend meaning: it is a shareholder reward paid before the announcement of the fiscal year’s results. It can be funded by retained earnings from previous years.
Is interim dividend good or bad?
Interim and final dividend is a sign of a company’s financial stability. They increase overall investment returns. However, such payments may indicate that the company has limited capacity for business expansion. They also have tax implications for investors.
What is the difference between final dividend and interim dividend?
A final dividend is paid once a year, following the publication of the annual financial results and the annual general meeting. Interim distributions may be made several times a year. Payment is typically made from the previous fiscal year profits.
What is the difference between interim dividend and ordinary dividend?
Ordinary dividends are regular payments on a company’s common shares. In 1099-DIV, their amount is indicated in line 1a. This amount includes all interim payments as well.
Article Sources
Kaźmierska-Jóźwiak, B. (2015). Determinants of dividend policy: Evidence from polish listed companies. Procedia Economics and Finance, 23, 473-477. Malik, F., Qureshi, M. U., & Azeem, M. (2019). Determinants of dividend policy: Empirical evidence from financial sector of Pakistan. Journal of Asian Business Strategy, 9(2), 192-213.
