Differences Between Interest vs Dividend

Interest and Dividend 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, 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/loss a company would make. Dividend determines how much profits would be reinvested into the business.

Interest and Dividend Comparison Table

Conclusion

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 a 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.

Recommended Articles

This has a 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 –

•  Leasing vs Buying 
• Capital Reserve vs Revenue Reserve
• Zero Based vs Traditional Budgeting
• Unsecured Loan vs Secured Loan

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