Interim Dividend Vs Final Dividend

In the previous article, we discovered that a dividend is a reward for the shareholder for taking the risk to invest in the company. You also got to know about different ways to compute the dividend and its impact on financial statements and share prices. But there is more in the topic than you probably know because this isn’t something people frequently talk of in the markets.

Dividend, a source of periodic income, is further categorized into two types: Interim Dividend and Final Dividend. In this article, clear all of your confusions about these two types of dividend.

What are the Final Dividends?

If you have read the Companies Act, you would know how the dividend is declared. And if you haven't, don't worry, we have got you covered.

After the end of each Financial Year, companies conduct Annual General Meetings (AGM) of shareholders in which they have the right to vote on various decisions. It means you can attend AGM even if you have bought only one share of a company! But it is not advisable as a single vote will have a negligent effect on these decisions.

Anyways, one such decision is the declaration of dividends. It is declared by the Board of Directors but approved by shareholders in AGM through an Ordinary Resolution (i.e., approval of 51% of shareholders should be there). The dividend decided in AGM and declared after preparation of financial statements is called the final dividend. And its amount depends on the annual profits and the dividend policy of the company. Therefore, it is more significant as compared to the Interim Dividend. 

For example, you have 500 shares of HDFC, and the company has declared a dividend of Rs. 10 per share. You will receive a total dividend of Rs. 5000. Next year, if the company pays a dividend of Rs. 15 per share, you will get Rs. 7500 (if you hold 500 shares as on record date).

Not every company is Majesco Ltd, which declares the dividend of the value of share price and remains listed on the Stock Exchange! This type of dividend is known as liquidating dividend. It is paid at the time of liquidation of the company. And its amount is the surplus left with the company after selling all assets and paying off all the external liabilities.

What is an Interim Dividend?

Sometimes, the company earns decent profits before the end of the Financial Year. In that case, the company may decide to declare a dividend at that time only, i.e., before the end of the Financial Year. Such dividends are declared before conducting the AGM is called Interim Dividend.

It is declared before the preparation of financial statements. So, the Board of Directors is quite conservative in declaring an interim dividend to avoid undesirable consequences in the remaining year. Therefore, they are declared at the time of releasing quarterly or semi-annual earnings. For example, NALCO announced a dividend in November 2020 after releasing the 2nd quarterly and semi-annual results of the company.

Before understanding the factual difference between the interim and final dividends, let's understand both using examples:

On 16th February 2021, Nestle India Ltd declared a dividend of 650%, whose ex-dividend date is 29th April 2021. It will be a final dividend as it will be paid after the close of FY 20-21.

On the other hand, Coal India Ltd declared a dividend of 50% on 23rd February 2021 with an ex-dividend date of 15th March. It was an interim dividend as it was declared before the end of FY 20-21. So, AGM will be conducted after the payment of the dividend.

Differences between Interim Dividend and Final Dividend 

Although they both are a type of dividends, they are different from each other. Some of the key differences include:

• Declaration and Approval of Dividend: The Board of Directors declare the final dividend. But it is approved by the shareholders in the AGM of the company. But shareholders can only decrease the rate of dividend. The maximum rate of dividend is proposed by the Directors. Whereas the interim dividend is declared and approved by the Board of Directors. There is no involvement of shareholders in deciding to declare Interim dividend.
• Funding of the Dividend: Since the Final Dividend is paid after the preparation of Financial Statements, it is usually paid out of the current year's profit. But Interim Dividend is paid before the actual profit for the Financial Year can be determined. So, it isn't declared out of current year profits. Rather it is declared out of the free reserves of the company.
• When are they paid? Generally, Final Dividends are paid every year the company has incurred profits. It is to induce the investors not to sell their shares and to maintain a good reputation. But an interim dividend is paid only when the company earns exceptional profits during the Financial Year.
• Amount of dividend: Generally, the interim dividend is less as it is declared before the actual financial results are known. So, the board adopts a protective approach. On the other hand, the final dividend is more as the accurate picture of profits is known. Accordingly, the Board decides the dividend to be declared based on the dividend policy of the company.
• Revocation: Did you know that the Board of Directors can revoke the interim dividend before its payment? But it is generally not done as it creates a negative image of the company. Whereas the final dividend becomes a debt for the company if approved by the shareholders. And cannot be cancelled.

The Bottom Line

In this article, we explored the two types of dividends: Final Dividend and Interim Dividend. The final dividend is declared at the AGM and approved by the equity investors. The interim dividend is declared before the end of FY. And all the decisions relating to it are taken by the Board. We also went through the amount of dividend, sources of paying these dividends, and the circumstances in which they are declared.

In the end, we would suggest you not to consider dividend as the sole deciding factor in your investment strategy. If you're indeed looking for a periodic passive source of income, go for dividend-paying stocks, else opt for companies that have good growth prospects.