What is an Interim Dividend? Meaning, Benefits & Calculation

An interim dividend is a payment made before the end of the financial year, based on earnings up to that point. Unlike the final dividend, declared after the year ends, interim dividends offer shareholders a snapshot of the company's financial health mid-year.

Interim dividends are declared mid-year by companies with strong financial performance, paid from retained earnings or current profits. Unlike final dividends, which are based on total yearly profits, interim dividends are based on profits from the first half of the year.

Interim dividends offer multiple benefits to both companies and their shareholders:

Shareholder Satisfaction

Interim dividends help in maintaining a positive relationship with shareholders by rewarding them before the year ends.

Financial Flexibility

Companies that declare interim dividends demonstrate their strong cash flow and profitability in the short term. It indicates the company’s willingness to share profits with shareholders.

Attracting Investors

Paying interim dividends can attract more investors, especially those seeking regular income, such as income-focused investors or retirees.

Signal of Profitability

For companies, an interim dividend acts as a signal of robust profitability and financial health, which can enhance investor confidence.

The calculation of interim dividends depends on the company's profits, its dividend policy, and other relevant factors. The formula for calculating an interim dividend is as follows:

Interim Dividend per Share = (Total Profits for the Period / Number of Outstanding Shares) × Dividend Payout Ratio

Where:

• Total Profits for the Period refers to the profits generated by the company up until the point when the interim dividend is declared.
  

• Number of Outstanding Shares represents the total number of shares issued by the company.
  

• Dividend Payout Ratio is the percentage of the profits that the company has decided to pay out as dividends.
  

Example:

Let’s consider a company that has earned ₹1 crore in profits for the first six months of the financial year, with 10 lakh shares outstanding. If the company’s dividend payout ratio is 40%, the interim dividend calculation would be:

Interim Dividend per Share = (1,00,00,000 / 10,00,000) × 0.40 = ₹4

Thus, each shareholder would receive ₹4 per share as an interim dividend.

In India, the Companies Act, 2013 governs the payment of interim dividends. According to the law, a company can pay interim dividends from its current profits or retained earnings. However, the following legal provisions apply:

Board Approval

Interim dividends must be declared and approved by the company’s board of directors.

Payment from Profits

Interim dividends can only be paid from the profits available at that point in the financial year.

Legal Compliance

The company must ensure that all statutory requirements are met when declaring interim dividends, including filing relevant documentation with the regulatory authorities.

No Shareholder Approval

Unlike the final dividend, the interim dividend does not require shareholder approval in a general meeting. It is solely at the discretion of the board of directors.

By adhering to these legal provisions, companies can ensure that interim dividends are paid out correctly and in compliance with regulatory standards.

Interim and final dividends, although both being forms of profit distribution, differ in several ways:

Timing

Interim dividends are paid in the middle of the financial year, while final dividends are paid at the end of the year, after the financial statements are finalised.

Calculation Basis

Interim dividends are based on profits made up to that point in the year, while final dividends are based on the company’s total annual profit.

Board Approval

Only the board of directors approves interim dividends, while final dividends require approval by shareholders at the annual general meeting (AGM).

Interim dividends are recorded as current liabilities in financial statements until paid, reducing retained earnings on the balance sheet. They are not listed as expenses on the profit and loss statement, as they represent a profit distribution, not an operating cost.

Interim dividends let companies share profits early, reflecting strong performance and providing early returns. Understanding the differences between interim and final dividends is crucial for investors in dividend-paying stocks.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.