Interest Rates vs. Dividends – What Are They? — Niagara Regional FCU (2024)

FAQs

What is the difference between interest and dividends in credit unions? ›

Dividend rates are prospective until actually declared; interest rates are set according to contract in advance and are earned on that basis. Share accounts establish a member (owner)/credit union (cooperative) relationship; deposit accounts establish a depositor (creditor)/depository (debtor) relationship.

Interest and Dividend – Key differences

Interest is charged against profit. A dividend, on the other hand, is the proportion of profits. No matter what happens – profit or loss- a firm must pay interest to its debenture holders/lenders.

Given as a percentage based on the account balance, APY is a projection that represents the expected amount of earnings after dividends accrue and compound for a full year. The dividend rate is an annual rate of return used to calculate daily and monthly earnings for a savings account.

It's important to remember most credit unions call the money it pays you for keeping your money on deposit at the credit union a dividend. It's important to remember that not all accounts pay dividends or interest. So shop around and compare the types of accounts that are available.

In other words, dividend income is more tax-efficient than interest income. This means that investors in dividend-paying investments keep more of what they earn after taxes. Capital gains are triggered when you sell your investment for a higher price than your book value (also called adjusted cost base or ACB).

Generally, dividends are better for those seeking potential growth and reinvestment options, despite higher risks. Interest, on the other hand, is more suited for those prioritizing stability and safety, albeit with typically lower returns.

Credit unions referred to their payments to members as “dividends” for several reasons, primarily because they were payable on shares. Additionally, unlike interest on bank deposits, their amounts were not preannounced and could vary depending on how well the organization had performed across the previous year.

A bond paying fixed coupons is defenseless in the face of rising rates—when rates rise, bond prices typically fall. Stocks, however, are different. Earnings grow. So too can dividends.

Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

Credit unions shall calculate dividends on the full amount of principal in an account for each day by use of either the daily balance method or the average daily balance method. Credit unions shall calculate dividends by use of a daily rate of at least 1/365 of the dividend rate.

Why do credit unions have better interest rates? ›

Credit union profits go back to members, who are shareholders. This enables credit unions to charge lower interest rates on loans, including mortgages, and pay higher yields on savings products, such as share certificates (the credit union equivalent of certificates of deposit).

The average credit union savings interest rates, or the dividend rates, are usually between 1% and 3%, but there's no standard amount. Credit unions vary a lot, and each one has certain advantages and disadvantages.

You typically won't see a credit union advertising the interest rate its share account pays. That's because in the parlance of credit unions, a share account pays dividends, not interest.

Yes, there are a lot of advantages. However, there's also a price to pay for those benefits. The most obvious advantage of dividend investing is that it gives investors extra income to use as they wish. This income can boost returns by being reinvested or withdrawn and used immediately.

What Is an Example of a Dividend? If a company's board of directors decides to issue an annual 5% dividend per share, and the company's shares are worth $100, the dividend is $5. If the dividends are issued every quarter, each distribution is $1.25.

Distributions are generally remitted via electronic funds transfer (EFT), using the banking information the liquidating agent has on file.

Many deposit accounts receive an interest rate (banks) or dividend rate (credit unions). This rate does not take into account the compounding of earnings within the year. Savings and checking accounts providing easy access to funds may pay lower rates.