Shareholders are entitled to a share of the profits made by the company.
Dividends are appropriations of profit after tax.
A company might pay dividends in two stages during the course of their accounting year:
- In mid year, after the half year financial results are known, the company might pay an interim dividend.
- At the end of the year, the company might pay a further final dividend.
The total dividend for the year is the sum of the interim and the final dividend. Not all companies pay an interim dividend. Interim dividends are, however, commonly paid out by public limited companies.
At the end of an accounting year, a company’s directors may have proposed a final dividend payment, which has not yet been paid. This means that the final dividend should be appropriated out of profits and shown as a current liability in the balance sheet.
Not all profits are distributed as dividends; some will be retained in the business to finance future projects. The “market value” of the share should, all other thing being equal, be increased if these projects are profitable.