Are dividends the same thing as interest payments?

Asked by Sally

2 Answers

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Answered by Richard Salter, IFA in Trowbridge, WILTSHIRE
No Interest is paid on loans of cash. We should all be most familiar with interest.

By contrast Dividends are the business investment trading returns 'divvied' up ('divided up' if you prefer) between shareholders. If the shareholders - who own the business - can afford and desire to do so, they can award themselves a dividend. However if no profit is being made or capital is felt more desired to be reinvested into the business then a reduced dividend, or no dividend at all, will be paid. Interest is typically paid on a regular (often monthly or annual) basis - typically at a defined rate of return for a defined period. The loan of capital on which the interest is being paid is then repaid - or the investor can accept a revised rate of interest return.

Dividends are typically paid twice a year. An interrim amount half way through the year and a final amount designed to more accurately reflect the whole trading year profits. Some businesses will pay more frequesnt dividuends which attract those sekeing more regualr income payments but these are in the minority.

Dividends are often unrelated to the current share price of the underlying company paying them. Thus a company can see its share price fall or rise whilst its dividend is maintianed or even increased! A few compaines have even managed to pay an ever increasing dividend every year for over tweny years. Others have of course come and gone in this time.

It might be argued that dividends are part of the return to investors who have taken the risk of investing in that particular business and as such should pay a risk premium better than interest. However you can make relatively safe loans in return for typiclly low interest payments and you can also make relatively speculative loans in return for higher promised interest payments - but at much greater risk of capital loss. | 12.03.10 @ 17:01
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$commenter.renderDisplayableName() — {comment} | 08.17.17 @ 01:48
Answered by Darren Smith, IFA in Basingstoke, HAMPSHIRE
Dividends are your "share" of the profits made by the company in which you have invested. Whereas, as Richard states, the interest paid on savings or charged on loans is the reward/cost of the money being available. Your savings bank will pay you for letting them use your money for their trading activities and they will decide a rate at a level to attract new deposits (or sometimes to deter them) its a purely commercial decision and a company can pay you interest even if they are not profitable (and not paying a dividend on their shares).

The income tax treatment of interest and dividends is also different. | 12.07.10 @ 13:56
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$commenter.renderDisplayableName() — {comment} | 08.17.17 @ 01:48
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Answered by

Richard Salter
Richard Salter, IFA in Trowbridge, WILTSHIRE

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