Advance Dividend Details

Not all public companies pay dividends to their shareholders. Many newer established companies will prefer to put their profits, if any, back into the business. Generally, well-established companies pay regular dividends, and a company will declare its final dividend for the fiscal year at its Annual General Meeting. In the United States, many companies pay dividends quarterly, every six months, or, in some cases, every month. Advance dividends are those dividends that a company pays before it pays the final dividend. Advanced dividends are also known as interim dividends.

A company that pays an advanced dividend runs a risk of doing so. A company technically does not have to pay out a dividend. At the end of the fiscal period, if a company finds that it has made less profit than it expected, management may decide that it cannot or should not pay a dividend. Therefore, paying an advance dividend is a sign that management has confidence in the company's performance. Confidence expressed by paying an advance dividend is often reflected in a higher share price, thereby forming a virtuous circle.

Many investors rely on income from dividends. The investor pays less tax on dividend income than she does on ordinary income because the company will pay taxes on its profits through corporate tax. Corporate tax is an expense that leaves less money in the company coffers. Less cash on hand reduces the amount available for dividend payment. If the investor were to pay full income tax on dividend income, the same money would be taxed twice.

Real World Example of Advance Dividend

Majesco is an Indian company that specializes in modern technology solutions for the insurance industry. In 2020, Majesco sold its American operations to Thoma Bravo, a private equity firm. Following this sale, Majesco declared an advance dividend of 974 rupees per share. This is equivalent to around $13 per share, welcome news to its shareholders.

Coca-Cola sold beverages worth $33 billion in 2020. Its dividend has risen, year on year, for the last 59 years. And despite lower sales during the pandemic, the company remains committed to paying a dividend of around 3%. Coca-Cola pays a year-end dividend and three advance dividends in April, July, and August. This regular payment of a high dividend keeps its investors happy, and they can rely on a steady income from their investment.

There are various reasons why a company such as Majesco or Coca-Cola might pay an advance dividend:

  • The company has enough cash to pay a dividend to its shareholders before the end of the financial year.
  • Paying an advance dividend may improve the company's cash flow. In effect, the company is paying off part of a future expense.
  • The company is sending a strong signal to its current shareholders and to potential future investors. Management is confident in the company's future and the service it provides.