An interim dividend meaning refers to an amount paid by a listed company to its shareholders during its fiscal year.
Companies usually declare this payout after quarterly or half-yearly financial results are released. It typically serves as an early distribution of profits, which can be a sign of financial strength.
Example of Interim Dividend
Suppose a company, ABC Ltd., generates higher returns during the first 6 months of the fiscal year. To distribute this profit among their shareholders, the board of directors decides to provide an interim dividend of ₹0.5 per share.
Now, if an investor holds 1,000 shares, they would get ₹500 as an interim dividend. The company ABC Ltd. makes this payment before the company’s annual general meeting.
The interim dividend formula is pretty straightforward. Interim divided per share: (Company's profit*dividend payout ratio/number of shares you hold)
Why Do Companies Issue Interim Dividends?
There are multiple reasons why companies pay this to their shareholders:
- They want to develop confidence in their shareholders by sharing profits consistently.
- They utilise it as an indicator that the entity is performing well and generating higher returns.
- This way, companies try to manage their capital structure, where dividends play a pivotal role.
- Sometimes, companies rely on this method to effectively use their surplus cash.
How Do Companies Fund Interim Dividends in India?
Entities in India fund interim dividends through various resources. They include:
- Current Profits: It refers to the earnings generated in the first half or quarter of a fiscal year.
- Retained Earnings: It refers to profits that have not yet been shared with the company’s shareholders.
- Free Cash Flow (FCF): FCF refers to the funds a company generates after covering all expenses (operational and capital expenditures).
The main difference between interim and final dividends lies in the timing of declaration and payment.
Interim dividends are declared and paid during the financial year, whereas final dividends are declared at the end of the financial year.
