Dividends vs. Interest: Which Is Better?
Written by
Elizabeth Constantineau, AI Editor
Edited by
Emily Gadd
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Dividends and interest are important terms for investors to understand.
Both offer unique benefits and can play different roles in your investment portfolio. Here’s what you need to know.
See:
What Are Dividends?
Companies pay dividends to their shareholders. The money usually comes from the company’s profits. They are typically paid out on a regular basis and can be in cash or additional stock.
Understanding Interest
Interest is the income earned from depositing money in interest-bearing accounts or from bonds. It is essentially the cost paid for using someone else’s money.Â
Interest can be earned from savings accounts, certificates of deposit accounts or bonds. It’s considered a more predictable form of income compared to dividends.
Key Differences Between Dividends and Interest
Is earning interest the best way to grow your money, or are dividends better than interest? It really depends on the specific stock or savings asset you choose and what your financial goals are.
Pros and Cons of Earning Dividends
| Pros | Cons |
|---|---|
| Provides a consistent payout | The payout can sometimes be less than a dollar for a financial quarter. |
| Dividends can be reinvested to purchase more stock in the company, helping you secure more dividends. | If the company has a low earnings year, they can lower or not pay dividends. |
| Dividends can be taxed higher than interest. |
Pros and Cons of Earning Interest
Interest-earning investments, such as bonds or savings accounts, come with their own set of advantages and disadvantages. These need to be considered to determine if they fit an investor’s risk profile and income needs.
| Pros | Cons |
|---|---|
| For investments like bonds or CDs, earnings will be fixed and predictable. | The interest for a high yield savings account can be changed at any time. |
| Interest can be reinvested, helping you earn more interest. | If your interest rates are lower than the rate of inflation, your money will lose its purchase power over time. |
Final Take
There’s a lot to consider about the benefits and drawbacks of earning dividends and interest. One thing to keep in mind is that an investment portfolio with many different types of assets has the best chance of weather market downturns and inflation rates.Â
That means you should have assets that earn interest and pay dividends.
FAQ
Here are the answers to some of the most frequently asked questions about dividends and interest.- Do you pay more taxes on dividends or interest?
- The tax treatment of dividends and interest can vary. Qualified dividends are taxed at the lower capital gains rate, whereas interest income is usually taxed as ordinary income. Therefore, the tax rate on interest might be higher depending on your income bracket.
- Can I receive both dividends and interest at the same time?
- Yes. It's possible to own stock that pays dividends and invest in accounts like CDs that earn interest at the same time.
- How do I start earning dividends or interest on my investments?
- Look at stocks that have larger dividend payouts and purchase interests through a brokerage account. There are many types of accounts that pay interest including bonds, high-yield savings accounts and certificates of deposits. Each type of investment has different benefits and considerations depending on your financial goals.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
