Dividends And The Difference Between Interim Dividend and Final Dividend

June 20th, 2006 Comments off
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This article describes briefly what are dividends and then proceed to differentiate interim and final dividend.

Generally, what do we mean by dividends?

When profits are divided among the shareholders of a company, each shareholder receives a portion of the profit called dividends.

How dividends are computed:

Dividends are calculated based on the paid-up capital of the company and are usually expressed as a percentage.

For example: a dividend of 10% on 5,000,000 ordinary share of $1 each means $500,000 ( 10%$5,000,000 ) will be paid out for ordinary share dividend.

So let’s say if you a shareholder with 10,000 ordinary shares, you will received $1,000 (10% x $10,000) cash in dividend.

What is the difference between Interim Dividend and Final Dividend?

INTERIM DIVIDENDS:

Interim Dividends are declared and distributed before the company’s annual earnings have been known.

These interim dividends are paid out of undistributed profits (reserves) brought from previous periods.

A company may choose to pay interim dividend quarterly or half yearly as long as it has adequate undistributed profits brought forward from previous periods.

These dividends usually accompanies the company’s interim financial statements

FINAL DIVIDENDS:
Final dividends are declared at the end of the financial period whereby the directors are aware of the company’s profitability and financial health.

Normally, final dividends are declared before the books are closed and will be paid the following year. Thus final dividends will appears as dividend payable or proposed dividends under current liabilities in the Balance Sheet of that period.

Normally, compared to interim dividends, the final dividends % constitute the largest payout.

SALIENT POINTS TO NOTE
<1.Dividend whether it is interim or final NEED NOT be in CASH form. These non-cash dividend are called in different names like SCRIP dividend scheme ( practiced by HSBC Holding ) or Dividend REINVESTMENT Plan.The objectives of non-cash dividend whether scrip or reinvestment is the issuance of new ordinary shares in lieu of the cash dividend the shareholders are supposed to receive.
<2.When we buy shares of public listed companies, we need to understand the two terms used for any dividend declaration: EX-dividend: the shares you are buying does not include any dividends CUM-dividend. : the shares you are buying includes the dividends which is going to be paid out on the due payment date
<3.For Ordinary Shareholders, there is no fixed rate of dividend compared to others like the preference shareholders. For the preference shareholders, both the interim and final dividend added together cannot exceed the pre-determined fixed rate of dividend.
4.There are many reasons to declare dividend which we shall discuss this in another article

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Financial Accounting

 
 

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