Interest vs Dividend | Top 9 Differences (with Infographics)

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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 shareholders and preference shareholders. 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

Interest vs. Dividend Infographics

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

Interest vs. Dividend Infographics

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 dividend 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 dividend 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

Basis for Comparison of Interest vs. DividendsInterestDividend
1.    MeaningInterest is the charge against the money that is offered to the borrower.A dividend is a percentage of profit offered to a company's shareholders.
2.    What it’s all about?It can be called a fee for letting someone use someone else's moneyA dividend is a way of giving back to the company's owners.
3.    Nature It is a charge against profit.It is a proportion of profit.
4.    Is the profit necessary?No. Interest needs to be paid even if there’s no chance of making profits.Yes. To distribute the dividend, making profits is necessary.
5.    DeterminesHow much profit would be earned or how much loss a company would incur?How much money can be reinvested into the business!
6.    Paid toThe lenders, the creditors, and the debenture holders;Equity shareholders and preference shareholders;
7.    Optional?Never. It must be paid.Yes. A company can decide when to pay a dividend and when not to.
8.    How is it calculated?Fixed (either simple or compounded)It depends on the company and its strategic plans, but it remains fixed for preference shareholders.
9.    The benefit in tax expensesThe company gets tax benefits when they pay interest to debenture holders.There’s no tax benefit for distributing a dividend.

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; 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.