Interest vs Dividend | Top 9 Differences (with Infographics)

The key difference between Interest vs Dividend is that Interest is the borrowing cost incurred by the company during an accounting period against the funds borrowed by it from the lender, whereas, dividend refers to the portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company.

Differences Between Interest vs Dividend

Interest and dividends are entirely different concepts.

On one note, receiving interests and dividends seem like incomes for an individual, but interest and dividend both of these have different meaning, 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.

Interest-vs-Dividend

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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-vs-Dividend

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Interest and Dividend – Key differences

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

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 that is offered to the shareholders of a company.
2.    What it’s all about?It can be called a fee for letting someone use the money of someone else.A dividend is a way of giving back to the owners of the company.
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 benefitTax BenefitTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more for distributing a dividend.

Conclusion

Even if interest and dividend are two separate concepts, both of these are a vital component in 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.

If a business doesn’t pay a dividend at all, why the shareholders would stick to the company? We can’t forget that the primary focus of the business is to maximize the worth of shareholders. That’s why interest and dividend, interest, and dividends are both critical for a business and for 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 comparison table. You may also have a look at the following articles to learn more –