Interim Dividend

Published on :

21 Aug, 2024

Blog Author :

Edited by :

Reviewed by :

The interim dividend is a kind of dividend paid by the company monthly or quarterly between two Annual General Meetings (AGM) and before the publishing of final financial results. The main purpose of this dividend is to incentivize the shareholders with a passive source of income.

Companies give interim dividends out of the retained earnings within a certain period. It includes profits from the last year too. In short, they are special payments made in cash to the shareholders. In addition, it acts as an indicator of future earnings to the investors. However, it involves formalities that can cause instability within the company.

Interim Dividend Meaning

An interim dividend is a dividend declared by the company (Board of Directors) between two annual general meetings and before the release of final financial results.
The Board pays this dividend from the retained earnings or free reserves of the previous financial years. Therefore, this dividend lies between the proposed and final dividends.
It provides insights about future earnings and revenues to investors. Thus, a lower dividend signifies lower earnings.
They pay on a monthly or quarterly basis to shareholders. The company must pay the shareholders within 30 days of issue.

Interim Dividend Explained

Interim dividend payment refers to a separate incentive the company gives to shareholders about retained earnings during that period. Companies usually declare this payment either every month or quarterly basis. However, this payment is declared before the AGM, which acts as a metric for the analysts. As a result, companies distribute them before announcing the financial statements.

The company's Board of Directors (BOD) decides whether to issue such a dividend. Compared to others, the declared interim dividend is usually lower. However, the final decision on the amount of interim dividend lies with the shareholders, who form a majority. In addition, the frequency of the interim dividend declared depends on the profits earned. So, if, during a quarter, the company made good revenues, there can be the issuance of an interim dividend. However, this announcement would be made before the AGM.

The analysts and investors eagerly wait for this declaration so that they can predict the results of the AGM. In short, this dividend acts as news for inside trading. Investors already analyze the upcoming financial results and trade their position. In contrast, the shareholders receiving the dividend need to file Form 1099-DIV under Internal Revenue Service (IRS). Also, they can claim a deduction of qualified dividends if they meet certain requirements under Topic No. 404.

The interim dividend payment has certain requirements associated with it. They are as follows:

The company must declare the interim dividend in the Articles of Association. Otherwise, they cannot issue this dividend.
The company cannot withdraw this dividend once issued. The shareholders hold the prime right to claim it.
It should not create any liability for the company. The Board of Directors must issue interim payments from the retained earnings from last year's reserves instead of current earnings.

How To Calculate?

To calculate the interim dividend for a particular quarter, the Board of Directors has to analyze the reserves and retained earnings from the previous years. As a result, the interim amount depends on the free reserves retained. So, if a company has good reserves for the last three years, the interim dividend issued is also higher. However, it will always be less than the final dividend. Likewise, a lower earning predicts a lower dividend declared. It is done to protect from overspending the reserves and ensure smooth operations of the company.

The company can make payment of this dividend in cash, cheque, warrant, or electronic mode. The issuance of interim dividends occurs between two annual general meetings. The company will deposit it in the shareholder's account within five days of declaration. However, if the company fails to pay the declared dividend, every director will be imprisoned with an interest penalty.

Interim Dividend Procedure

Let us look at the interim dividend procedure in India to understand the concept better:

#1 - Meeting Of The Board Of Directors (BOD)

Before declaring an interim dividend, the BOD holds a meeting to check the retained earnings and available reserves. Here, they will decide the profit percentage to be transferred to reserves, the amount of dividend, and the number of shareholders receiving it. Also, the company will open a separate bank account to deposit the amount within five days of declaration. Then, the Board will authorize and print the dividend warrants for further issue as per the instructions. Finally, they will pass the Board Resolution to declare and issue such dividends.

#2 - Preparing For The Issue Of Dividend

Once the resolution passes, the Board will make a good list of shareholders and associated details. It includes name, address, number of shares held, and others. Also, they need to pay dividend taxes to the authorities on time.

#3 - Paying The Interim Dividend

The company must pay this dividend within 30 days to the shareholder in cash. The Board must create a separate account within seven days if it is not claimed or unpaid. However, if it remains unclaimed or unpaid after the expiry of 7 years, they must transfer it to the Investor Education and Protection Fund.

Examples

Let us look at the examples of interim dividends for a better understanding:

Example #1

Suppose National Mining Ltd is a popular stock engaged in the mining business on the New York Stock Exchange (NYSE). For the past three years, the company has been earning huge profits and transferring a certain percentage to reserves. In the second quarter of 2022, it declared an interim dividend of $20 among its shareholders. National Mining Ltd made this decision between the two AGMs as they have enough funds from the past years. After drafting the Board Resolution, it transferred the dividend amount to its shareholders. But, they failed to transfer the dividend to some shareholders.

Therefore, the shareholders raised the issue, and there was no effect. However, soon after, the Court penalized the directors and charged an interest of 18% on them.

Example #2

On November 21, 2022, the U.S. Solar Fund Plc, a renewable energy corporation, announced an interim dividend of 1.52 cents per share for the latest quarter. The record date of the dividend is December 16, 2022. However, the company will make the payment on January 6, 2023. In addition, another major dividend was declared by the Indian mining company Vedanta of 21 cents ($0.21) per share. The record date of this dividend pertains to next week.

Difference Between Interim Dividend And Proposed Dividend

Although interim and proposed dividends are an incentive for shareholders, they differ slightly. The former is the company's dividend before the upcoming financial results are released. The BOD pays the amount from the retained earnings and free reserves from the previous years. However, the proposed dividend is an announcement stating the company will issue a certain amount next year. Likewise, they will deposit a certain amount or provision, thus utilizing it for paying future dividends.

	Interim Dividend	Proposed Dividend
Meaning	The company pays a dividend between two annual general meetings.	Here, a proposed dividend is paid in the next financial year.
Objective	Provide a dividend from the previous year's profits and insights to the analysts about upcoming results.	To decide the dividend for the next year in advance.
Declaration	Declared before the release of financial statements.	Anytime during the financial year.
Payment made of	Retained earnings.	From a separate provision.

Frequently Asked Questions (FAQs)

Who is eligible for an interim dividend?

The shareholders or individuals holding a certain amount of shares in the issuing company are eligible for this dividend. However, if they sell the shares before the record date, the benefits will get passed on to the latter shareholder. Thus, holding the shares before the record till the ex-dividend date will enable dividend payment.

Can an interim dividend be declared after the year's end?

The companies must declare this dividend before releasing final annual financial results. Since the year-ending differs for every company, the declaration date can occur at any time.

Is the interim dividend part of the final dividend?

Both dividends are different depending on the payment made. In the former case, the payment incurs out of the retained earnings from the previous years. In contrast, the latter's payment happens from the current earnings as it is made at the year-end.

Can a company declare an interim dividend from the current year's profits?

As per the U.S. Code, the companies must pay from retained earnings. In addition, they can give a smaller amount if a loss is incurred.