What is The Difference Between Dividends and Interest
The terms Interest and dividends sound sort of like they should mean the same thing, very few understand clearly the distinction between these two terms, and it’s important that you understand the difference.
Interest is what you earn on your money by lending it. Any individual, entity or corporation can ask for a loan from creditors like Mombo Sacco for different purposes and the money has to be paid with a top up (better to say charges). From a different perspective, if you ask why your Sacco savings offers you “interest,” you would see that the Sacco pays you interests as you let them use your money.
There are many differences between interest and dividend. Let’s look at the key differences between these two;
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. |
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