Dividend and interest are two terms used by corporates in accounting. A dividend is an amount a company pays to all its shareholders with its annual profit.
Interest is the sum a borrower has agreed to pay along with the amount that he/she borrowed from an individual/institution.
Key Takeaways
- Dividends are payments made by corporations to their shareholders, distributing a portion of the company’s profits; interest is the cost of borrowing money or the return on an investment, such as a savings account or bond.
- Dividends are not guaranteed and depend on a company’s financial performance; interest is usually predetermined and paid at a fixed or variable rate.
- Both dividends and interest provide income to investors, but dividends are associated with stock ownership, while interest is tied to debt instruments or deposit accounts.
Dividend vs Interest
The difference between a Dividend and Interest is that dividend is the amount repaid to the shareholders proportionally from the profit gained. In contrast, interest is the amount to be paid back to the lender along with the capital borrowed from them.
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The dividend is the money paid to a company’s investors and shareholders from the annual profit. It is by expecting this amount; a businessman invests in a firm.
This profit is distributed and distributed among the investors proportionally according to their capital. Usually, a company is prohibited from distributing dividends from the money.
In the finance sector, interest is the amount a borrower has to pay back to the lender and the borrowed amount. Interest is a source of income for the lenders from the money they lend.
Interest rates differ from firm to firm and are divided into simple interest and compound interest.
Comparison Table
| Parameter of Comparison | Dividend | Interest |
|---|---|---|
| Focus | The dividend is the repayment of the amount gained from a firm by the financial support of investors. | Interest is the amount the lender fixes as a fee for the amount they lend. |
| Charge | The money repaid is from profit earned. Hence there is no surety for the complete repayment of the capital invested. | Interest is an added amount along with the capital invested. Hence the amount repaid is always higher than the amount lent. |
| Regulation | Investors know the money they can reinvest from the dividend amount in the firm. | The borrower can pre-plan the amount they must repay from the interest amount. |
| Choice | The dividend is from the profit amount, so the firm doesn’t need to repay it. | The interest amount is fixed at the time of borrowing, so it is compulsory to repay it. |
| Calculation | There is no fixed formula for calculating the dividend. It is proportionally given to the shareholders according to the money invested by them. | Simple interest and compound interest are the two methods by which the interest amount is calculated. |
What is Dividend?
The dividend is the process of distribution of the profit amount of a company to its shareholders. It is paid only from the profit a firm makes. Hence, the invested amount cannot be obtained back in one go.
This process of distribution of dividend amounts usually takes place annually. Sometimes the profit is not entirely transferred as dividends, and the amount is reinvested.
The distribution of profits can be done by any means. Mainly the profit is distributed in cash and deposit amounts. Sometimes the firm may organize dividend reinvestment plans.
Here the dividend amount goes into the investment of underlying equity. Another method is by repurchase, where a part of the share is returned as dividends. Asset transfers can also be shared as dividends.
The person, who is eligible for dividends, has to pay tax to the government for collecting it. This tax amount is acquired from the stakes issued by the dividend tax.
If a corporation pays dividends to its shareholders, no tax deductions are given to it. The amount paid as dividend tax differs from one country to another.
Dividends are evidence of the development of a business. The more dividends a shareholder receives, the more money they reinvest.
Although the payment method differs, the amount to be paid is compensated proportionally from the profit earned, and hence higher profit means a higher dividend amount.
What is Interest?
Interest is the amount to be paid and the principal amount after a certain borrowing period. The lender fixes this amount at the time of lending the principal amount.
Interest is an added income for the lender as it increases the amount they get back at the time of repayment. Since the rate increases as per a fixed margin, the borrower should carefully check the interest amount before borrowing.
Interest is not a positive aspect for the borrower, so the amount should be calculated beforehand. If the interest amount is too high, the borrower can be in debt as the amount to be repaid dynamically increases.
Borrowing an amount is a high-risk business; hence, most banks calculate the amount for their customers.
Interest can be calculated in detail using simple interest and compound interest. It is the lender’s wish to choose between these two.
In the case of simple interest, the interest amount remains the same irrespective of the time taken to repay. Compound interest increases when the time is taken to repay the principal amount increases.
SI = P[1+ RT]
CI = P[1 + R/n]nt
where:
- SI = Simple Interest
- CI = Compound Interest
- P = Principal amount
- R = Interest rate
- T = Period
- n = Number of times the interest is applied per period
- t = Number of periods elapsed
Main Differences Between Dividends and Interest
- The dividend is the profit amount that can be shared by all the company’s investors, whereas interest is the amount that has to be repaid along with the principal amount lent.
- There is no surety about a company’s profit; hence, the dividend cannot be promised. Interest is a promised amount whose rate is fixed when the money is lent.
- The dividend amount of a company is evidence of the growth of the company, and hence investors tend to reinvest if profit is high. The interest rate is used to pre-plan the money that must be repaid.
- The dividend amount is not from the capital investment; hence, investors cannot always expect a high profit. The interest amount acts as a fee for the principal amount lent; therefore, the lender consistently profits.
- The dividend of an individual is paid back according to the money invested by them. The interest amount is calculated using the fixed method among simple and compound interest.
- https://www.oecd-ilibrary.org/taxation/taxation-of-dividend-interest-and-capital-gain-income_5k3wh96w246k-en
- https://serval.unil.ch/resource/serval:BIB_0AE104867012.P001/REF.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
