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.
- Interest is a price (better to say charges), a borrower pays to a lender for letting the former use the money 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 interests as you let the bank use your money.
- A dividend, on the other hand, is a percentage of profit 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. and preference shareholders. For preference shareholders, a dividend is mandatory because they’re paid before equity shareholders are given a single penny. 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.
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 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 dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. 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 needs to pay interest to its debenture holders/lenders. Only when a company makes a profit, a dividend is 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. 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. Dividend determines how much profits would be reinvested into the business.
Interest and Dividend Comparison Table
|Basis for Comparison of Interest vs. Dividends||Interest||Dividend|
|1. Meaning||Interest 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. Determines||How much profit would be earned or how much loss a company would incur?||How much money can be reinvested into the business!|
|6. Paid to||The 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 expenses||The 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. for distributing a dividend.|
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. 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 –