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 completely 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 shareholders 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 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 needs to pay interest to its debenture holders/lenders. Only when a company makes a profit, a dividend is 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. 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 benefit for distributing a dividend.|
Even if interest and dividend are two separate concepts, both of these are a very important 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; 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 dividend both are important for a business and for perpetuating for a longer period of time.
Interest vs Dividend Video
This 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 –
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- Examples of Revenue Reserve
- Leasing vs Buying
- Capital Reserve vs Revenue Reserve
- Zero Based vs Traditional Budgeting
- Unsecured Loan vs Secured Loan