How to Compare a Dividend vs Interest

word-image-dividend-vs-interestI often hear these two terms used interchangeably but they have very different meanings. What I’d like to do is clear the air. After reading this, you will see the difference between a dividend vs interest.

Defining Dividends and Interest

Dividends are a sum of money paid by a company to its shareholders regularly as a portion of profits. This means if Company X makes a profit, in order to reward shareholders in their faith for the company, Company X will pay them a dividend.

Interest is the amount of money paid as a fee at a predetermined rate for borrowing money or delaying the payment of borrowed money. Often types, similar to individuals, companies will borrow money in order to grow their business. They will pay interest to a lender for the right to use the money with the stipulation that they will pay back the borrowed money and include an additional fee (interest) at a specified rate for the privilege.

Dividend % vs Interest %

dictionary-dividend-and-interest-definedIf your investment appreciated 8% over the course of the year, this will mean that your overall investment went up 14% because your investment appreciated 8% + 6% (dividend).

Interest percentage is the amount the company has to pay to lenders. If Company Y borrowed $40 million dollars at 3%, they will have to pay 3% annually on the balance remaining each year.

So if Company Y borrowed $40 million dollars and didn’t pay any of it back over the course of the year, they would pay $1.2 million dollars in interest for the privilege of borrowing the money and it would be added to the overall debt.

Relationship of a Dividend vs Interest in Regard to Profit

dividend thumbs up vs interest thumbs down

A dividend is a portion and product of profit. In order to give a dividend to shareholders, generally a company must be profiting. If a company made $200 million this year, they may take $3 million of that profit and split it among the shareholders in the form of a dividend. Some companies offer a fixed dividend where regardless of the amount of profit earned, the dividend remains the same. This creates a stable payout to shareholders that becomes predictable.

Other times, companies issue dividends based on the profit of the company. If they have a better year, they raise the dividend and if they have a disappointing year but are still profitable, they may lower them. This helps a shareholder measure the company’s strength and outlook.

caculator example of dividends vs interest

Interest on the other hand, goes against profit. If a company made $200 million this year in profit but pays $1.5 million in interest, they were only profitable $198.5 million. It cuts out of their profit.

Here’s a good way to look at it. If a company made $200 million, they may pay $1.5 million in interest. That brings them down to $198.5 million in overall profit. They reinvest $170 million into the company’s research and development, spend $20 million in a new advertising campaign and decide to issue $8.5 million to the shareholders as a dividend. In this case, $8.5 divided by $198.5 is a little over .04 so the company paid out about a 4% dividend.

Are They Tax Deductible?

In short, dividends are not tax deductible and for interest there is usually a tax incentive. Since interest MUST be paid, this doesn’t really matter as affect whether a company will choose to pay it or not.

For dividends though, taxes may influence whether to issue a dividend and if so, how much.

Where Can I Find Stocks That Pay Dividends?

webull screenshotThere are many stock brokers which have screeners built in that allow you to sort stocks by different criteria. One of those criteria is Dividend Yield %. Webull is one that I’ve reviewed before that makes it easy to identify High Yield Dividend Stocks. You can read my full Webull Review for more information on the benefits of Webull.

Bring It All Together

So as you can see, dividends are a portion of company profit that is shares with the shareholders. Interest is a fee paid by a company for the privilege of borrowing a larger amount of money from a lender. You should now know the major factors that make these two terms different.

If you would like to see the historical data on dividends issued or see the dividend yield and dividend ratio equations click here.

If you still have questions, please feel free to leave a comment below and I’ll try to answer your question as soon as as I have a chance.

Until next time, let’s start investing!

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8 thoughts on “How to Compare a Dividend vs Interest”

  1. Hello, 

    this post helped me a lot to get familiarized with terms I didn’t know much about and I think it will help a lot people too. Also adding frequent questions that perhaps many people may be asking themselves seems very effective.

    Thank you for teaching others about these concepts and I hope I can learn more with your website!

    • I’m glad you have a better understanding of these terms. Sometimes it seems like people think the money they make from stocks is interest but it’s not. It’s either capital gains or dividends. I wanted to help clarify that with this article. 

  2. This is an informative and educative article. You have thoroughly put everything in perspective for anyone reading this post to understand the points. I have always thought there is no much difgerence between dividends and interest but you have opened my eyes to the beauty of these insightful definitions. Thanks for sharing

  3. Which is better , lending money to get interest or investing in a company to get dividends?if a company shares a portion of it’s profit to its shareholders, where does the rest go? In my opinion both interest and dividend are products of gains from the money invested. 

    Not all dividends are profitable as sometimes the company’s value might drop and still give dividend to its shareholders. This is a technical topic and am happy the writer has done justice to it.

    • Both are beneficial. You can find places to loan money and retrieve interest. One company is called prosper. They allow you to loan money at a defined interest to someone for a predetermined amount of time. Dividends pay the shareholders like you said. Both can provide profit. It’s really up to you and your risk tolerance.

  4. hello

    interesting post; I know about interest and dividends, but I did not know that some companies pay each year a fixed amount for dividends, regardless of the profits made; I still suspect that the shareholders consent is necessary, right?

    Dividends are distributed from net profit. Shareholders will pay a dividend tax; at least it is in my country

    • The only way shareholders can avoid receiving dividends is by signing up for D.R.I.P. which stands for Divodent Reinvestment Plan. DRIP allows you to take dividends and automatically reinvest them in the original investment. Depending on your country, this may prevent taxes since they are reinvested and not realized through withdrawal.

  5. Hi Eric,

    I appreciate this distinction you’ve provided for investors between dividends and interest. Any time you’re investing money, it’s certainly a good idea to understand how you’ll earn returns, Interest feels a little less risky since your return is guaranteed where dividends are often not guaranteed. On the flip side, returns on stock investments have the potential to be quite a bit more substantial if a company is highly profitable. Is that a fair assessment? Thanks for the info!

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