What is a dividend?
Companies have the option of raising capital through two major asset classes namely, debt and equity. If they choose the latter mode, then they ought to pay dividends to the shareholders on a periodic basis. Companies usually opt to pay dividends to incentivize equity shareholders who are looking for income along with share price appreciation. These dividends paid are generally calculated as a percentage of earnings and distributed on a per share basis. A dividend is a liability to the company.
What is an interim dividend?
An interim dividend is a dividend payment made before a company's annual general meeting and before the release of final financial statements. This declared dividend usually accompanies the company's interim financial statements and are paid out monthly or quarterly. The company's Board of Directors declares the interim dividend, but the final approval must be given by the shareholders.
Calculation of Interim Dividend
If both an interim and final dividend is handed out in the same fiscal year, then the interim dividend is generally lesser than the final dividend. The Board of Directors can choose to keep the interim dividend at lower rate to prevent it from impairing the company’s ability to operate, if the annual results turn out to be lower than initially expected.
How is Interim dividend funded?
Interim dividends are paid from retained earnings, which includes 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.
