Final DividendDividends declared after company financial statements are prepared and issued

There are two primary ways of earning with stocks.

One is through buying and selling stocks (a.k.a. stock trading).

Ideally, you would want to buy low and sell high.

This way, you would profit from the difference between the two prices.

This way requires a little bit more activeness on the part of the investor or trader though.

S/he has to pay attention to changes in stock prices. This is so that s/he can earn the most profit that s/he can.

The other way is to hold on to your stocks and let them earn dividends.

This is a more passive way of earning through stocks.

You just have to wait until the company you invested in declares and distributes dividends (preferably cash dividends), and when it does, you earn a profit.

The issue with this though is that a company may not always issue dividends.

That is unless it’s dividend policy states that it must issue dividends annually.

But if you don’t want to deal with the intricacies of stock trading but still want to invest in stocks, holding on to them may still be profitable for you because of dividends.

In this article, we will be discussing a term that is more frequently used in the UK  – the final dividend.

We will be defining it so that we can learn what makes it distinct from the usual dividend.

We will also be making comparisons to other types of dividends. By the end of this article, we should be more familiar with the term final dividend.

What is a Final Dividend?

The term final dividend refers to the dividend that the company’s board of directors declares and distributes after the preparation, audit, and release of financial statements.

The board of directors typically announces it at a company’s annual general meeting (AGM) and is subject to shareholders’ approval.

This is in contrast with the interim dividend which is declared and paid before a company’s financial statements are prepared and issued.

As such, the final dividend tends to be larger than any interim dividends issued during the same fiscal year.

Final dividends often come in the form of cash dividends, though there may be cases where they’re stock dividends instead.

Sometimes, it could be both cash and stock dividends. Once a company’s final dividend has the approval of its shareholders, it becomes an obligation that the company has to pay.

It becomes binding and irreversible, hence, the term final.

Final dividends are paid either quarterly, semi-annually, or yearly depending on the company’s dividend policy.

It is the company’s board of directors that decides the amount of dividends that the company will distribute to its shareholders.

They only become final once they get the approval of the shareholders.

Just like with any other dividend, the final dividend should align with the company’s dividend policy.

Analysts (and even company management) may be able to forecast a company’s amount of final dividend.

They do so by looking at certain financial data such as previous years’ financial statements and interim financial statements.

Because of this, the final dividend may also be referred to as the adjusted final dividend or the revised final dividend.

Example of a Final Dividend

To illustrate a final dividend, let’s have an example. Let’s say that you own 300 shares of ZX company.

As per ZX company’s dividend policy, it must pay (if it can) $1.00 dividends per share every year.

This means that you should be earning $300 per year from dividends alone.

During ZX company’s most recent annual general meeting, the board of directors announced that dividends for that year are doubled meaning that each share will be paid $2.00 in dividends.

It got the approval of the shareholder, which means that it’s final. You’ll be receiving $600 dividends for this year instead of the usual $300.

Final Dividend VS Interim Dividend

A company’s board of directors may announce dividends even before the release of annual audited financial statements.

We refer to these dividends as interim dividends.

An interim dividend is typically smaller than a final dividend.

This is because the board of directors tends to be conservative with its amount.

Without the final and audited financial statements, the board of directors cannot be 100% sure of the company’s final financial performance for the year.

Other than that, the differences between the final dividend and the interim dividend are as follows:

• The declaration of interim dividends is typically based on a company’s interim financial statements. It could be because the company is performing beyond expectations for that interim period. On the other hand, the declaration of final dividends is typically based on audited financial statements.
• A company’s obligation to pay interim dividends is reversible. It only needs the approval of the shareholders for its cancellation. On the other hand, the obligation to pay final dividends is irreversible and final. The company has to pay for them once approved by the shareholders.
• Interim dividends are usually declared and paid in the middle of a year in the UK. In the US, interim dividends are declared and paid every three months (or quarterly). On the other hand, final dividends are declared annually, but they can still be paid quarterly, semi-annually, or annually.

Final Dividend VS Liquidating Dividend

The term “final dividend” might lead you to think it will be the last and final dividend that the company will ever pay as it ends its existence.

It could be true in some cases. However, there is a more appropriate term for this kind of dividend – the liquidating dividend.

This is because we commonly refer to the process of closing a business – be it partial or final – as liquidation.

A liquidating dividend is what a shareholder would receive during a partial or full liquidation.

Unlike other dividends, a liquidating dividend may be from any tax liability.

This happens when the liquidating dividend is made from the company’s capital base.

In other words, if a liquidating dividend is merely a return of capital, then it’s not taxable.

Liquidating dividends usually are the last obligation that a company undergoing liquidation will pay.

This is because shareholders are the last priority in the hierarchy of payees.

The issuance and payment of liquidating dividends mean that the company no longer has any assets remaining.

Thus, the business can be finally shut down.