Dividend refers to a percentage of the earnings of the organization that is not held by the company but distributed among its owners, or shareholders, based on the number of shares owned as a return on their investment. A dividend is basically compensation paid to shareholders for owning stock in the company. Therefore, dividends are a significant way for businesses to encourage investors to purchase their stock.
Why do companies pay Dividends?
In order to repay their shareholders for giving them the money to operate the company, businesses pay dividends from their earnings. The board of directors is responsible for deciding what percentage of the profits they use to pay dividends and how much they can keep in the company. However, it is not compulsory for a corporation to pay dividends. It is possible to issue dividends in different ways, such as cash payments, stocks, or any other form. The dividend of a corporation is determined by its board of directors and needs the approval of shareholders.
What is an Interim Dividend?
A dividend payment made before the annual general meeting of a company and the release of final financial statements is an interim dividend. It is declared by the board of directors but is subject to shareholders' approval. The interim dividend is paid out of the retained profits of a company or the surplus of the financial year in which it is announced.
If a company registers a loss prior to the specified declaration of dividends, the average rate measured on the basis of the dividends declared in the preceding three financial years must be declared. It is deposited within five days of the declaration into a scheduled bank account. The same occurs regardless of the holidays involved.
What is the Final Dividend?
A final dividend refers to a dividend declared by the board of directors of a company after the full-year financial statements for its fiscal year have been released by the company. The company is obligated to move part of the profit to the company's reserve prior to the dividend declaration. The organization may then decide freely on the amount to be transferred to the reserves.
A final dividend may be a fixed sum paid on a quarterly, semi-annual, or annual basis. That is the amount of profit that is paid. The dividend strategy chosen depends on the board of directors' discretion.
Here are major differences between the Interim dividend and Final dividend-
|INTERIM DIVIDEND||FINAL DIVIDEND|
|Announcement||Announced by the board of directors and approved by shareholders.||Recommended by the Board at the board meeting and announced by the Members of the company at the AGM|
|Meeting||It is held between two general meetings.||Held once at the AGM|
|When is it declared?||Before financial statements are prepared.||After financial statements are prepared.|
|Revocation||With the approval of all shareholders, it can be revoked.||It cannot be revoked|
|Rate of Dividend||Less||Higher when compared to Interim|
|Articles of Association||It will be declared only if the articles expressly authorize the declaration.||No special clause in the articles is required.|
The interim dividend is announced by the Board of Directors, while the shareholders declare the final dividend at the Annual General Meeting.
Before preparing the final accounts, an interim dividend is announced. A final dividend cannot be announced until the books have been prepared and revenues have been calculated.
The interim dividend is typically six months for a portion of the yea. A final dividend covers the year as a whole.
The directors can also cancel the interim dividend declaration after it has been announced. After a final dividend has been made, the shareholders cannot cancel the statement.