What Is an Interim Dividend? How It's Paid and Who Is Eligible

What Is an Interim Dividend?

An interim dividend is a dividend payment made before a company's annual general meeting (AGM) and the release of final financial statements. This declared dividend usually accompanies the company's interim financial statements. The interim dividend is issued more frequently in the United Kingdom where dividends are often paid semi-annually. The interim dividend is typically the smaller of the two payments made to shareholders.

Key Takeaways

  • An interim dividend is typically one of two dividends given out by a company that is providing shareholders with income on a semi-annual basis.
  • The interim dividend is usually paid out ahead of a firm's annual general meeting and the release of the final version of its financial statements.
  • Final dividends are paid out after the release of the final version of a company's financial statements.
  • As a result, final dividends are paid from current earnings, and interim dividends are paid from retained earnings.
  • The company's Board of Directors is responsible for declaring an interim dividend, but whether it's approved or not is up to shareholders.

Understanding an Interim Dividend

Individuals invest in companies through bonds or stocks. Bonds pay a set rate of interest, and investors have seniority over shareholders in the case of bankruptcy, but investors do not benefit from share price appreciation. Stocks do not pay interest, but some do pay dividends. Dividend payments allow shareholders to benefit from earnings growth through both interim and final dividends as well as share price appreciation. Directors declare an interim dividend, but it is subject to shareholder approval. By contrast, a normal dividend, also called a final dividend, is voted on and approved at the annual general meeting once earnings are known. Both interim and final dividends can be paid out in cash and stock.

The issuing of an interim dividend is a more common practice in the United Kingdom, where dividends are often paid to shareholders on a semi-annual basis.

Final Versus Interim Dividends

Dividends are paid out per share owned. For example, if you own 100 shares of company A, and company A pays out $1 in dividends every year, you will receive $100 in dividend income every year. If company A doubles its dividend, the company will pay out $2 per share, and investors will receive $200 annually. Final dividends are announced and paid out on an annual basis along with earnings. Final dividends are announced after earnings are determined, but companies pay out interim dividends from retained earnings, not current earnings.

Retained earnings can also be thought of as undistributed profits. Companies typically pay these dividends on a quarterly or six-month basis before the end of the year. Interim dividends are paid every six months in the United Kingdom and every three months in the United States. Companies declare and distribute an interim dividend during an exceptional earnings season or when legislation makes it more advantageous to do so.

A final or regular dividend can be a set amount that is paid every quarter, six months or year. It can be a percentage of net income or earnings. It can also be paid out of the earnings left over after the company pays for capital expenditures (CapEx) and working capital. The dividend policy or strategy used is dependent on management's goals and intentions for shareholders. Interim dividends can follow the same strategy as final dividends, but since interim dividends are paid out before the end of the fiscal year, the financial statements that accompany interim dividends are unaudited.

If both an interim and final dividend is handed out in the same fiscal year, the interim dividend is typically the smaller of the two.

Interim Dividend Example

On Feb. 13, 2019, Plato Income Maximiser Ltd (ASX: PL8) announced an interim dividend. Shareholders of record on Thursday, Feb. 28th would be given a dividend of 0.005 per share on that day. The firm's director notes that the firm understands retirees need to supplement government pensions. This need is why the firm's "investment strategy prioritizes regular and sustainable dividend payments."

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