Differences Between Interest vs Dividend

Interest and dividends are entirely different concepts.

  • Interest is a price (better to say charges); a borrower pays to a lender for letting the former use the money the latter has had. From a different perspective, if you ask why your savings bank account offers you “interest,” you would see that the bank pays you interest as you let the bank use your money.On the other hand, a dividend is a percentage of profit a company shares with its equity shareholdersEquity ShareholdersShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more and preference shareholdersPreference ShareholdersA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more. For equity shareholders, a dividend is only paid when the company decides to pay off the equity shareholders out of the profits earned after paying the debt holders and preference shareholders. For preference shareholders, a dividend is mandatory because they’re paid before equity shareholders are given a single penny.

On one note, receiving interests and dividends seem like incomes for an individual, but interest and dividends have different meanings, nature, scope, and opportunities.

In this article, we will talk about these two subjects in detail. And we will also do a comparative analysis of interest vs. dividends.

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Interest vs. Dividend Infographics

As you can see, there are many differences between interest and dividend. Here are the most significant ones –

Interest and Dividend – Key differences

There are many differences between interest and dividend. Let’s look at the key differences between these two –

  • Interest is the charge against the money lent to the borrower. A dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more is the percentage of profit distributed.Interest is charged against profit. A dividend, on the other hand, is the proportion of profits.No matter what happens – profit or loss- a firm must pay interest to its debenture holders/lenders. Only when a company makes a profit is a dividend distributed. However, the preferred dividendPreferred DividendPreferred dividends refer to the amount of dividends payable on preferred stock from profits earned by the company, and preferred stockholders have priority in receiving such dividends over common stockholders.read more is given when profit is made; paying a dividend to equity shareholders remains optional.Interest is paid to the lenders/creditors/debenture holders. A dividend is paid to the preferred shareholders and equity shareholders.Interest determines how much profits/losses a company would make. A dividend determines how much profits would be reinvested into the business.

Interest and Dividend Comparison Table

Conclusion

Even if interest and dividend are two separate concepts, both of these are vital components of a business. Interest helps a business reduce tax expenses and earn greater financial leverage. A dividend, on the other hand, ensures that the business is running well. If a business doesn’t pay interest, then the business won’t be able to earn financial leverage;Financial Leverage;Financial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more because not paying interest means there’s no debt.

Why would the shareholders stick to the company if a business doesn’t pay a dividend at all? We can’t forget that the business’s primary focus is to maximize shareholders’ worth. That’s why interest and dividend, interest, and dividends are critical for a business and perpetuating for a more extended period.

Interest vs. Dividend Video

This article has been a guide to the top differences between Interest vs. Dividend. Here we also discuss the differences between the two with examples, infographics,  and a comparison table. You may also have a look at the following articles to learn more –

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