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Dividends are payouts from companies to their shareholders. It signifies a part of the company’s profits. Paying dividends is not compulsory for organizations. But they often do so as a way to reward investors for their support. The dividends can either be in the form of cash or bonus shares. Different types of dividends exist, such as interim, special, regular, and final. This article will focus specifically on the final dividend.
The concept of final dividend
Every type of dividend has a different meaning. So, what is final dividend?
After reviewing the company’s financial performance, the Board of directors announces a final dividend. This decision is made during the Annual General Meeting after considering factors like financial stability and liquidity.
Declaring a dividend doesn’t require any special authorization in the company’s bylaws. Once declared, the dividend cannot be retracted.
The final dividend is set apart from the company’s net profit after setting aside funds for business operations. Analysts and board members often provide estimates for final dividends. The final declared dividend may also be referred to as a “revised” or “adjusted” dividend.
Companies may not all pay dividends to their shareholders. However, companies that pay dividends regularly often follow established policies. These policies can aim to maintain the same level of dividends over time or gradually increase them year after year.
Calculating the final dividend
The stages for calculating the final dividend of a company are as follows:
- Decide the company’s total earnings for the whole fiscal year. It will be shown in the annual financial records of the company.
- Subtract any interim dividends already given out during the year from the total profit. Interim dividends are partial dividend payouts made before the completion of the final reports.
- The Board of managers will suggest a suitable final dividend distribution percentage from the remaining earnings. This proportion is referred to as the dividend distribution ratio.
- After accounting for interim dividends, employ the dividend distribution ratio to the remaining net profit. This shows the complete sum of the eventual dividend.
- To figure out the dividend per share, split the total ultimate dividend sum by the count of outstanding shares.
- The dividend per share and any interim dividends constitute the total dividend for the complete fiscal year.
- The final dividend is then recommended to shareholders for authorization at the AGM before its official declaration and payout.
Primary characteristics of final dividend
Some key characteristics of the final dividend declaration are as follows:
Timing
Companies usually announce their final dividends at the close of the fiscal year. It happens after completing an audit of their annual financial reports. This process guarantees that dividend payments are based on accurate financial information.
Decision by shareholders
The final dividend payment demands approval froms shareholcders. They decide the dividend amount together. They also determine how it will be distributed.
Not compulsory
Declaring final dividends is never necessary. The decision to pay a final dividend depends on factors like the company’s financial stability and profits.
Importance of final dividends
Have you tried to comprehend the significance of the final dividend journal entry? Check that out below:
Return on investment
As an investor, final dividends are a direct reward for your investment. They refer to a portion of the company’s profits distributed to shareholders. These dividends enhance the return on your investment. So, you get a tangible benefit from the company’s success.
Investor confidence
Final dividends demonstrate a company’s financial stability and willingness to share profits with its investors. This can increase investor trust and confidence in the company’s long-term prospects. The knowledge that the company is consistently distributing earnings can entice new investors and encourage existing shareholders to continue supporting the company.
Financial condition indicator
A company’s decision to declare a final dividend is often viewed as a positive indicator of its financial well-being. If a company regularly declares final dividends or gradually increases them over time, it may reflect a profitable and responsibly managed business operation.
Difference between final and interim dividend
If you compare interim dividend vs final dividend, you will find some differences in the approval process. Unlike final dividends, which require shareholder approval at the AGM, interim dividends are approved by the Board of Directors based on estimated profits without shareholder involvement. Final dividends are proposed by the Board and subject to shareholder approval based on audited, full-year financial statements that reflect actual company profits.
| Criteria | Interim Dividend | Final Dividend |
| Timing | Declaration happens periodically in a financial year (usually half-yearly) | The final dividend declaration happens once in a financial year after all annual accounts are ready. |
| Based on | Company’s projected or estimated profits | Company’s actual profits in a full financial year |
| Purpose | Offers regular income to shareholders | Distributes remaining profits among shareholders |
| Profit Distribution | The interim dividend is subtracted from the final profits to determine the final dividend | Comprises the whole dividend payouts |
| Amount | It is not a fixed amount because it can increase or decrease | It is a fixed amount recommended by the board during AGM approval |
| Payment | Paid out within 1 to 2 months of declaration | Paid out within 30 days of AGM approval |
Example of a Final Dividend
A final dividend is the dividend paid by a company after the financial year has ended. It is typically declared after the company’s annual general meeting (AGM) and is based on the company’s overall performance for the year. The amount of the final dividend is determined by the company’s board of directors, taking into account the company’s profits, reserves, and future business plans.
Example of a Final Dividend:
Let’s say a company called XYZ Ltd. reported a net profit of ₹50 crore for the financial year 2024. After evaluating its financial health, future plans, and cash flow requirements, the board of directors declares a final dividend of ₹10 per share.
- Dividend Declaration:
- Number of shares: 5 million shares
- Final dividend per share: ₹10
- Total dividend payout: ₹10 * 5,000,000 = ₹50,000,000
So, if you own 100 shares of XYZ Ltd., you will receive a final dividend of ₹1,000 (100 shares * ₹10 per share).
The final dividend is usually paid after the company has approved its accounts for the year and after shareholders have voted on the proposal during the AGM. It is often paid in the form of cash, though it can also be issued in stock, depending on the company’s policies.
Final Dividend vs Liquidating Dividend
While both final dividend and liquidating dividend involve the distribution of company profits to its shareholders, they are distinct in terms of their context and purpose.
Final Dividend:
- Context: A final dividend is declared by a company at the end of its financial year based on its annual profits. It is part of the company’s normal business operations.
- Purpose: The final dividend is paid out to shareholders as a share of the company’s profits for the year, typically after the company has fulfilled its operating expenses, reinvested in the business, and accumulated sufficient reserves.
- Frequency: The final dividend is typically declared once a year during the AGM after the company’s financial results have been audited.
- Example: A company declares ₹10 per share as a final dividend after its annual financial year ends.
Liquidating Dividend:
- Context: A liquidating dividend is declared when a company is in the process of liquidating its assets. This occurs when the company is closing down, either voluntarily or due to insolvency.
- Purpose: The liquidating dividend is paid out of the company’s remaining assets after it has sold off its assets and settled its liabilities. This is not a regular business practice but happens in special circumstances like liquidation or winding up.
- Frequency: Liquidating dividends are one-time distributions paid during the liquidation process.
- Example: If a company is liquidating its assets and has ₹20 crore in remaining funds after paying off debts, it may declare a liquidating dividend to distribute the remaining assets to shareholders.
Conclusion
Final dividends are referred to as year-end dividends. Unlike a liquidating dividend, this term does not imply the final payment by the company. A liquidating dividend is paid when a company dissolves its operations. It distributes the remaining capital to shareholders after asset sales and debt settlement. You should know that ear-end dividends originate from the company’s operating profits. But liquidating dividends come from the company’s capital base.
FAQs
Shareholders typically get dividends as cash. But some companies may offer extra shares of stock instead. The Board of Directors will verify and approve the company’s financial records.. After that, the dividends are paid out as a final step.
Several significant dates are crucial for an investor when receiving a final dividend. The primary date to be mindful of is the declaration date, which is when the dividend is officially announced. Following that, the record date is another vital date for any shareholder. This indicates the date by which a shareholder must hold shares in their Demat account to qualify for receiving dividends. The third important date is the ex-record date. This is the date by which an investor must purchase shares to have them credited to their Demat account on or before the record date. Lastly, the payment date is the final date that an investor needs to keep in mind. This is when the dividend is deposited into the bank account.
The final dividend is declared by the board of directors after reviewing the company’s financial performance. Shareholders approve the dividend at the Annual General Meeting (AGM). A record date is set to identify eligible shareholders. Once approved, the dividend is paid to shareholders, either in cash or shares. This process ensures shareholders receive a portion of the company’s profits for the year.