Interest vs. Dividends

Difference Between Interest and Dividends

We hear so much interest and dividends are paid to the investors by different companies but we rarely pay attention to fundamental differences between these two terms. Most people think of interest as the money paid by a company to its lenders and dividends as the share of profit earned by a company with the shareholders of it. But there is much more to the concept of interest and dividends and that will be explained in this article.

Interest

Interest is amount of money that is charged by the lender on the invemstment from his client for the money or the loan he has taken. When a company develops or needs money to invest in plant and machinery, it has the option to raise the capital through the performance of loans from lenders such as banks or even private investors. The amount of money paid by the company is determined in terms of percentage of the principal amount and is known as interest. A company also pays the interest on the bonds it issues to the public. All the money a company pays in the form of interest debtors and bondholders is considered as the company’s expense and reduces net income of the company’s income and thus it is also taxable. While cash is reduced with the company when it must pay interest to different lenders, it also saves money in a form of reduced income tax.

Dividends

If a company makes a profit, it is its duty to share them with the shareholders of it. The amount of dividend is not fixed and continues to vary with the changing profits margin of the company. If a company suffers loss the profit is very small and it probably will not issue dividends. Dividends are mainly in the form of cash, but sometimes they pay in the form of securities of the company as well.

Dividends are counted in the expenses incurred by company and as such they do not reduce the net income of the company. Dividends are similar to the returns of property which one receives. Dividends may be declared annually, half yearly, and quarterly or even monthly as per the company rule.

 

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