Introduction

If you buy a company’s shares, you become a shareholder. Companies will reward you by paying you dividends, which is essentially a portion of the company’s profits distributed to you, its shareholders. You can get dividends in the form of additional shares, cash, etc. This reward is a testament to the company’s success and a much-needed bonus to retain you, an existing shareholder while attracting new investors.

There are three types of dividends, namely, final, interim, and special dividends.

As important as it is for you to get dividends, companies must also maintain their financial and operational efficiency. One concept that plays a vital role in striking this much-needed balance is interim dividend. Read on to learn what it means for you, how it is calculated, examples, reasons, etc., to get a better understanding of the concept.

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What is Interim Dividend?

Any dividend that you get before the annual general meeting and the preparation of the final financial statements is known as an interim dividend. It is usually declared annually or quarterly, depending on how frequently the company releases its financial statements during a fiscal year. This periodic income, though smaller than final dividends, allows companies to share their profits with you without waiting until the end of a fiscal year.

How to Calculate Interim Dividend?

Interim dividends are allocated to you from the company’s earnings, according to your shareholdings in a per-share proportion. The formula used is:

Interim dividend per share = (Earnings of the Company x Dividend Payout Ratio)/Number of Shares

The simplest way to understand this calculation is through an example. Let us assume you hold 1000 shares in a company. The company earned ₹15,00,000 in the first quarter with a dividend payout ratio of 25% and total shares of 10,00,000. Using the above-mentioned formula, its interim dividend per share will be ₹0.375 (15,00,000 x 0.25/10,00,0000). According to this calculation, you will receive an interim dividend of ₹375 (₹0.375 x 1000 shares).

You will get smaller payouts in interim dividends as compared to final dividends, but they are an effective strategy for maintaining the company’s operational efficiency even if current earnings fall short of projections.

How is Interim Dividend Funded?

Every year, companies set aside a certain portion of their earnings as a financial cushioning for the future, known as retained earnings. It denotes the company’s undistributed profits and accumulated earnings. This is the primary source of funding for interim dividends. So, the company can pay you interim dividends without straining its current-year profits.

Before declaring such dividends, the company’s financial health, including its projected cash flow and liquidity, is thoroughly assessed to ensure this decision doesn’t adversely affect you or the company. Other alternative funding methods used for interim dividends include the use of liquid assets, issue of new shares, or issue of stock options.

Why is Interim Dividend Paid?

Here are some common reasons why companies pay interim dividends.

• Companies share their profits with you through interim dividends. This practice helps them to retain you as a shareholder while improving their confidence and attracting new investors.
• By declaring interim dividends, the company showcases a strong financial position. Since these dividends are usually paid from retained earnings, they show that they have enough left over after meeting their financial commitments to share some of the excess with you.
• A combination of the above-mentioned factors improves the company’s reputation and your perception of the company in the market.
• Another reason for declaring interim dividends is to manage capital structure. It helps the company maintain a much-needed balance between distributing profits to you and retaining sufficient profits for the future.

Conclusion

Interim dividends offer numerous benefits, from providing a periodic income and improving your confidence as a shareholder to indicating robust financial performance. They play a vital role in the securities market and help companies reward you. By understanding interim dividends mean, how they are calculated, and how they are funded, you can make informed financial decisions.

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