Interim Dividend
Candlefocus EditorThe motivation for companies to issue interim dividends is to demonstrate to their shareholders that their investments will generate a regular, and typically reliable, return. It also presents an advantage for investors who need to receive income in between dividend payments as it presents them with more predictable returns.
When declaring a dividend, a company's board of directors generally looks to cash reserves and earnings in order to decide how much of a dividend to declare. If a company’s income is increasing, it may decide to pay an interim dividend that is larger than the prior year’s, so as to put the shareholders at ease and give them an extra boost in their income. Similarly, if the company is short on cash or in need of reinvestment of earnings, then a smaller dividend than the prior year may be declared.
The size of an interim dividend will also be based on the company’s financial performance relative to expectations. Companies that have exceeded expectations will typically award a bigger dividend than simply what the dividend policy requires, in order to reward the shareholders. On the other hand, a company that is not doing as well financially may opt to pay out a smaller interim dividend than expected.
When analyzing whether or not to invest in a stock, investors often review the interim dividend payment to help them make their decision. Investors who are looking for a steady income every half year may opt for stocks that pay regular interim dividends as it gives them more control over their cash flow. Companies that offer smaller but more frequent dividends may be attractive prospects for investors who are looking for better returns. Overall, an interim dividend provides a valuable source of income for investors and gives companies the chance to demonstrate to their shareholders that their investments are profitable. Companies with a reliable and predictable stream of interim dividend payments can build up strong and loyal relationships with their shareholders. Furthermore, it allows shareholders to have more control over their cash flow and make decisions based on their current needs.