Interim and final dividend
An interim dividend is when the company announces a dividend during the year. This type of dividend is usually announced in mid-year or between the two annual general meetings. However, an announcement of the dividend requires authorization in the article of association.
On the other hand, the final dividend is announced at the end of the year after assessing the business’s annual financial performance. It’s a distribution of the earnings made by the company during the financial year. Although, dividends can be paid from the retained earnings.
Implementing two types of dividends at different times is to help the investors meet their cash flow needs. This also helps the company manage its liquidity position as they don’t have to pay a massive amount at once for dividends.
Characteristics of the interim dividend
Following are the characteristics of the interim dividend.
- The interim dividend is distributed among shareholders of the company before calculating the annual earnings/annual results.
- It’s paid from retained earnings of the company. In other words, the payment for the interim dividend is made from the profits made by the company in the past year as current-year earnings have not been calculated as of the date of announcement/payment of the dividend.
- BOD also declares an interim dividend that propose by management. However, the finalization of this dividend is subject to the approval of the shareholders.
- Interim dividend requires authorization in the company’s article of association. In other words, the company cannot declare an interim dividend it’s not mentioned in the article of association.
- The dividend can be reversed after the announcement. Hence, the shareholder’s legal right is created when an interim dividend is paid.
- The announcement of the interim dividend does not create liability for the company.
Advantages of the interim dividend
Following are the advantages of the interim dividend.
- It strongly signals the market about the better financial condition of the company. This will make rate of dividends increases the market’s confidence in some particular security.
- Announcement of the interim dividend does not establish the legal right of entitlement for the shareholders. Hence, it can be revoked by the company.
- This type of dividend is paid from the retained earnings in the company’s balance sheet and usually after the preparation of the interim financial statement. Hence, there is no much difficulty in assessing the amount of the dividend to be paid.
Disadvantages of the interim dividend
Following are the disadvantages of the interim dividend.
- The payments of dividends are a regulated activity and require intensive record-keeping for compliance purposes. Hence, it may be difficult and costly for the company to ensure appropriate procedural formalities.
- The payment of the interim dividend takes place in mid of the financial year. Hence, it may be a cause of the problems in the current financial structure of the company.
- If a company with practice to pay interim dividend holds for a time. It may signal to the market as an instability of the company.
Characteristics of the final dividend
Following are the characteristics of the final dividend.
The business’s financial performance is assessed at the end of the year by a review of the audited financial statement.
- The final dividend is dependent on the performance of the business during the financial year. In simple words, the final dividend is the distribution of the profit earned by the company during some specific financial year.
- In the the company annual general meeting, the board of directors recommends the amount of the dividend. However, it’s finally declared by the shareholders of the company.
- This type of dividend is paid out of the earnings in the current year as it’d a distribution of the profit earned by the company during the year. Although, the board of Directors may decide to pay the dividend from retained earnings.
- There is no authorization required from the article of association to declare this type of dividend.
- The final dividend is normally declared at the annual general meeting, and the rate of the final dividend is higher than the interim dividend.
- Once a final dividend is declared, it cannot be reversed. It’s because when a dividend is announced, it becomes a liability for a company to be paid. Hence, shareholders can even sue the company for their dues.
- It cannot be decided and announced before the authorization of the audited financial statement.
Advantages of the final dividend
Following are some of the advantages of the final dividend.
- This type of dividend is announced when the company is sure about the financial performance of the year under consideration. So, there is less judgment, and the company knows how much it has earned and the amount it intends to pay.
- The shareholders feel confident about the performance of their investment in the company. Receipt of the profit helps the investor to believe that they have invested at the right place.
- Payment of the dividend signals that the company’s performance is stable, and potential investors will be attracted towards the company. So, there will be higher chances for a company to raise the finance.
- The dividend is announced after considering capital expenditure and working capital requirements. So, it means excess cash is taken out of the company’s financial system and paid to the shareholders. Hence, it does not affect the financing needs of the company.
Disadvantages of final dividend
Following are some of the disadvantages of the final dividend payment by the company.
- Once a dividend is announced, it becomes a liability and cannot be revoked under any circumstances. So, it’s rigid compared to the interim dividend, which the company can cancel.
- The payment of the final dividend may deplete the company’s balance sheet from retained earnings if there are no earnings in the current year.
- The payment of the dividend reduces the financing capacity of the company. Hence, they may not be out of financing after paying the dividend.