When we invest our money somewhere, we are entitled to a return. Most people confuse Dividends with Interest. Both concepts are similar yet different. We either lend money to someone or invest money into stocks.
When lending money, we receive a return in the form of Interest. Whereas, when we invest our money in stocks, we receive a return in the form of a Dividend.
Comparison Between Dividend And Interest
|Meaning||It refers to a rate of return made to those who have invested in an organization or business. It can be best described as an honor or reward made to people for investing.||It refers to a rate of return made to those who have lent money to an organization or business. It can be best described as a charge or fee made to people for lending.|
|Nature||It comes into the category of appropriation of profits.||It comes into the category of the charge against profits.|
|Payment||The payment of this type of return is not mandatory to make.||The Payment of this type of return is mandatory to make. It is because, before lending money, the lender and borrower must have agreed to a particular fixed rate of return and time.|
|Presence of Profit||If the concerned business or organization is incurring a loss, then they do not have to pay the concerned investors. It is because the investors are the owners, and it is their duty to first pay all debt and Interest before earning themselves.||The interest payment must be made even if the business or organization incurs losses.|
|Paid to||It is paid to anyone who has invested in the concerned business or organization by paying money and helping the organization generate funds.||It is paid to anyone who has lent money to the concerned business or organization by paying money and helping the organization generate funds. These people typically include creditors, debenture holders, lenders, etc.|
|Rate of Return||The classic feature of this type of return is that its rate of return is not fixed. It is because the payment of this depends on many things such as profit earned and performance of various stocks, etc.||The hallmark feature of this type of return is that its rate of return is always fixed. No matter the situation, how much is the profit, how much is the loss, etc.? The payment of Interest is always made in a fixed amount.|
|Types||It can be broadly categorized into two types: Simple and Compound.||It can be broadly categorized into five types: Cash, Stock, Property, Scrip, and Liquidating.|
|Example||Stocks are one of the best examples of this type of return. People who invest in Stocks grab their share in the ownership and receive a return as a Dividend.||Bonds are classic examples of this type of return. People who invest in Bonds become the lender of the concerned organization and receive a return in the form of Interest.|
Major Differences Between Dividend And Interest
What exactly is a Dividend?
A dividend is best described as the return received on the money we invested somewhere. It should be noted that lending money to someone does not mean investment. The best example of this type of return is Stocks.
When we buy an organization’s Stocks, we invest in them and receive a dividend from their profits. However, it should be noted that paying is not mandatory, especially if the concerned organization has not made any profits.
Characteristics of Dividend
- It is a return received for the money we have invested somewhere.
- It is paid to investors after paying any debt or Interest to the lenders. The concerned organization doesn’t need to pay dividends to the investors, especially when they have not made any profits.
- Since it is not mandatory to even pay a Dividend, thus, the rate of return is not even fixed.
- It is considered an appropriation of profits.
- It is largely paid to Common and Preferred Stockholders. It is a must to pay Preferred Stockholders, who are paid after the payment of Interest and debt. Common Stockholders are paid at last, and paying them is not a must.
- It can be broadly categorized into five types: Cash, Stock, Property, Scrip, and Liquidating.
Key Differences: Dividend
- It is the return received on money that has been invested. It can be described as thanking the investor for investing in the concerned organization.
- It is not a mandatory payment. It can be paid or not, depending on the situation.
- If people have invested in an organization, they must repay the money after paying Interest and Debt. In corporate, preferred stockholders are paid right after the payment of Interest. At last, common stockholders are paid, which is not mandatory.
- The amount of this type of return does not have a fixed rate. It keeps on changing as per the surroundings.
What exactly is Interest?
Interest can be best described as a charge paid to lenders for borrowing money from them. Anyone who borrows money from anyone has to pay them a return in the form of Interest. The hallmark feature of this type of return is that it is always paid to the concerned lenders.
Even if the borrowing party has not paid any profit, it is still a must for them to pay interest to the lenders. Unlike Dividends, the rate of Interest is always fixed.
Features of Interest
- It is a return received for the money we lent to someone.
- It is always paid first to all the lenders. After the payment of it, other payments are made. It should be noted that it is always paid even if the concerned party has incurred a loss.
- Its rate of return is always fixed.
- It is considered a charge against the profits.
- It is paid to various debenture holders, lenders, creditors, etc.
- It can be calculated in two ways, namely Simple and Compound Interest.
- It can be broadly classified into two main types: Simple and Compound.
Key Differences: Interest
- It is the return received on money a person lent to someone else. It can be considered a charge for lending money that is paid to the lender by the borrower.
- It is considered a mandatory payment. If an organization has borrowed money from someone, it must pay the lender his desired Interest.
- If an organization has borrowed money, they have to prioritize it and pay the lender before anyone else, even if they have not made any profit.
- One of the classic features of this type of return is that its amount is always fixed.
The Contrast Between Dividend And Interest
- Dividend – It refers to a return that is paid when someone invests in our business or organization. It should be remembered that lending money to someone does not mean an investment. It can be best described as an honor or reward paid to investors for investing.
- Interest is a return- paid when someone lends money to our business or organization. It can be best described as a charge or fee paid to lenders for lending money.
- Dividend – This type of return belongs to the appropriation of profits, meaning it is just a mere distribution of profits that are usually divided among owners.
- Interest – This type of return belongs to the category of the charge against profits, meaning it is a type of expense that is mandatory to bear.
Appropriation of profits vs. charge against profits: A comparison
Appropriation of profits
- As the name suggests, it refers to a sum of money collected as profits that have to be divided among the business partners or owners.
- Accounting of appropriation of profits is done in a profit and loss appropriation account.
- It is the amount that is left after the deduction of every charge or expense.
- It takes place only when the firm has made a profit.
- A dividend is the best example of appropriation of profits.
Charge against profits
- It refers to all sorts of expenses that are charged against profits. Deduction of such charges helps in the determination of net profit and loss.
- Accounting of charges against profits is done in a profit and loss account.
- It is done before handling the appropriation of profits.
- It takes place even if the firm loses, meaning it is mandatory.
- Interest is the best example of a charge against profits.
Presence of profit
- Dividend – It is only paid when the concerned organization makes a profit. If they are incurring losses, then it becomes a choice of paying. This is because when people invest in an organization, they are considered none less than the organization’s owners. And as owners, it is their responsibility to pay all the debt first. Hence, it demands the presence of profit.
- Interest – It is necessary to pay the concerned lenders even if the borrowing party is incurring a loss. This is because we have taken their money, and it is our due responsibility to pay the required Interest timely. Hence, it does not demand the presence of profit.
- Dividend – This type of return is not mandatory to pay. The investors duly understand that lenders and creditors must be paid first.
- Interest – It is a type of return that is mandatory to pay as we have to pay the due Interest to the lenders who have lent money to our organization.
- Dividend – It is paid to all those investors who have invested in an organization by paying money and helping the concerned organization generate capital funds.
- Interest is paid to everyone who has lent money to an organization. These people may include debenture holders, creditors, lenders, etc.
Rate of return
- Dividend – The classic feature of this type of return is that its rate of return is not fixed. This is large because Dividend payment depends on an organization’s profit in a given period.
So if there is a loss, some investors might not even get a return, if there is minimal profit, they might get a return according to that, and if there is a high profit, then again, they will get a return according to that.
- Interest – The hallmark feature of this type of return is that its sum is always fixed. Before a lender lends money to someone, there usually is an agreement between the lender and the borrower regarding the rate of return. When both parties agree to a certain rate of return, the borrower must always pay the desired Interest to the concerned lender.
- Dividends can broadly be classified into five main types: Cash, Stock, Property, Scrip, and Liquidating. A cash Dividend is concerned with the payment made to investors made in the form of cash. Stock Dividend is concerned with the payment made to investors through shares or stock.
Property Dividend is concerned with the payment made to investors in the form of property. Scrip Dividend is concerned with the payment done as a promissory note. Finally, liquidating Dividends is a type of return that is made to investors when the concerned business or organization is shutting down.
- Interest – It can broadly be categorized into two main types: Simple and Compound. Simple Interest is a very easy method of calculating Interest. It calculates Interest on the principal amount at a given interest rate.
On the other hand, compound Interest is a little complex method of calculating Interest. It calculates Interest on the principal amount + accumulated Interest.
Types of Dividend vs Interest
- Cash Dividend – As the name suggests, this type of Dividend involves making payment in the form of cash. It remains the most common way of making Dividends.
- Stock Dividend – Sometimes, people might not pay Dividends in the form of cash. They may send shares or stock to the investors as Dividends. This type of method is referred to as Stock Dividend.
- Property Dividend – If someone does not want to use cash and stock for a Dividend, they may use Property Dividend. This type of Dividend involves the payment of return in the form of some property.
- Scrip Dividend – Sometimes, people might not have cash, stock, or property to make a Dividend payment. In such cases, they issue a promissory note to the investors stating that they will pay on another day mentioned in the note.
- Liquidating Dividend – This type of Dividend is concerned with making Dividend payments when an organization or a business is shutting down.
- Simple Interest – Simple Interest calculates Interest for a particular amount of money at a given Interest rate. It stays the same, and its principal amount also stays the same.
- Compound Interest – Compound Interest is a little complex method of calculating Interest. This is because it takes the principal amount and the Interest accumulated to calculate it. Because of this reason, the principal amount keeps on changing as the Interest keeps on adding.
- Dividend – One of the best examples of Dividends in Stocks. Stocks are a way of generating money by giving people some part of ownership. When people buy Stocks of a particular organization, they invest in that concerned organization by paying them money in return for ownership in that organization. A dividend is paid to those Stockholders as a return.
- Interest – One of the best examples of Interest is Bonds. Bonds generate money by borrowing money from people in exchange for Interest as a rate of return. Since Bondholders lend money, they are treated as lenders of the organization and pay Interest regularly at a fixed rate of return.
Dividends and Interest are two forms of return that are often confused with one another due to several similarities. Somehow, both concepts are very different despite all the similarities.
A dividend is a form of return paid to those who have invested in an organization, whereas Interest is a form of return paid to those who have lent money to an organization.
Frequently Asked Questions (FAQs)
Q1. Why is it necessary to pay Interest even when there is a loss?
This is because, before lending money, the lending party and borrowing party agree on the fixed rate of Interest that has to be paid promptly. Moreover, it is the responsibility of the borrower to pay the Interest to the lender regularly.
Q2. What are the different types of Interests and Dividends?
The former can be categorized into two main types: Simple Interest and Compound Interest.
Q3. What are the major differences between Interest and Dividends?
The major difference between Interest and Dividends is that the former is paid to the lenders while the latter is paid to the investors. Another significant difference between the two is that the former is mandatory to pay while the latter is not.
Q4. What is the best example of Interest?
The best example of Interest can be described in the form of Bonds. When a person invests in Bonds, they become a lender to the concerned organization and receive a fixed interest in return.
Q5. What is the best example of a Dividend?
The best example of a Dividend can be described as Stocks. When a person is investing in Stocks, they become like an owner of the concerned business or organization and receive a Dividend as a return.
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