One of the many benefits of stock trading or investing in company stock are dividends. The part of profit distributed equally amongst shareholders by the company is called a dividend. Though a dividend is not an obligation, companies reward their shareholders for investing in the business through dividend distribution. There are various types of dividends like interim, special, regular or final dividends. This blog details the concept of final dividends.
Understand Final Dividend
A Final Dividend is an amount declared by the board of directors after the company issues its financial statements. It is declared in the Annual General Meeting, once the BOD is sure of the company’s financial health, cash flow, liquidity and other factors. No special resolution is required in the article of associations to declare the dividend. However, once the final dividend is declared, the company can not reverse the decision.
The corpus fund for the final dividend is differentiated from total profit after retaining funds for further business needs. The amount of final dividend is usually forecasted by analysts or even by the board members themselves in its earnings guidance. The final dividend declared by the company, in this case, is also referred to as a revised or adjusted final dividend.
Not every company issues dividends, but those companies who declare dividends regularly may have a set of policies defined to give consistent dividends or have a gradual increase in them over the years.
How is an interim dividend different from a final dividend?
The final dividend is usually a bigger amount than the interim dividend because, during the financial year, the company might not be fully aware of the cash flow availability and future contingencies.
The board of directors announces the interim dividend and is subject to the shareholders’ approval, while the final dividend is declared in the AGM post final earnings. Declaration of interim dividend requires a provision in articles of association.
Example of final dividend
Suppose ABC Ltd. issues a final dividend of Rs. 2 per share at their annual general meeting, and an investor holding 500 shares of that company, then the investor shall receive Rs. 1000 as the final dividend.
For the next year, if the company decides to double the dividend and declares Rs. 4 per share, investors will receive Rs. 2000 as a final dividend. The final dividend is usually paid in cash out of reserves.
Final Dividend Vs. Liquidating dividend
The final dividend is declared at the end of the financial year. It can be declared multiple times over the years. While the liquidating dividend is paid when the company ceases to exist and declares the termination of operations. It is a one-time payment made to its shareholders at the time of liquidating the company.
The final dividend is paid from the profits of the company while liquidating dividend is paid from the capital base of the company. The capital base is the leftover amount the company has after paying off the debts and liabilities from selling the assets.
