You’ve seen promotions for savings products such as certificates, savings, and checking accounts that show annual percentage yield (APY), interest rates or dividend rates.
Promotions for loans provide APRs and the interest rate.
Your banking statements may also show something called the annual percentage yield earned, or APYE on deposit accounts.
Here’s what all that alphabet soup means and why it’s important for your finances.
Dividend/interest rate
Thedividend rateis the declared rate paid on an account. 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. Money market accounts and certificates may pay higher rates. The quoted rates are applied to balances in the accounts, and financial institutions may pay interest or dividends monthly, quarterly, semi-annually, or annually.
For example: If you have $100,000 on deposit and the account earns an interest or dividend rate of 1 percent, you will receive approximately $82 a month. The earnings are calculated by multiplying the account balance by the dividend/interest rate. That total is then divided by 365 and multiplying by the number of days in month. Here’s what that looks like for a month with 30 days: (100,000 X 1%)/365 X 30 = $82.20
APY
The annual percentage yield (APY) refers to the amount of money you earn on a credit union or bank account over one year through dividends or interest. Unlike the dividend/interest rate, APY takes into account compound earnings. So each time you time earn dividends/interest, those earnings are adding to your balance.
Back to the $100,000 example. In month one, you earn about $82, bringing your balance to $100,082. The next month, that 1 percent dividend rate is now applied to $100,082. You’ve now earned $82.26 in dividends for that month, bringing your account balance to about $100,164. And so on. Basically, you earn dividends/interest on your dividends/interest!
APYE
The annual percentage yield earned (APYE), is included on your bank or credit union statements for deposit accounts. The APYE is an annualized rate that reflects the relationship between the amount of dividends actually earned on the account during the period and the average daily balance. The APYE is affected by deposits and withdrawals made during the statement period. The APYE may also be a lesser amount than the dividend rate, but this does not mean that your account was not paid the correct dividend rate.
APR
APR, or annual percentage rate, applies to open-ended loans, like credit cards, and for fixed-term loans, like an auto loan. For credit cards, interest rates are typically stated as a yearly rate and are applied when you carry a balance from one month to the next. Let’s say you have a credit card with an APR of 17.99% and want to figure out how much interest you will accrue on a balance of $1,000. First, divide 17.99% by 12 to find the monthly rate, which is approximately 1.49%. Then, multiply that 1.49% rate by the $1,000 you owe (1,000 X 0.0149) and you get $14.90 in interest for that month. The good news is you can avoid paying interest on your credit card if you pay off your balance due each month.
Learn More
Learn more about how to help your money grow with dividends and APY through SAFE savings, money market accounts and certificates at www.safecu.org/personal/grow-your-money
Learn more about SAFE’s credit cards at https://www.safecu.org/personal/borrow-money/credit-cards
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FAQs
Both are expressed as percentages. The key difference between APY and interest rate is compound interest. APY includes interest that's earned on the original balance as well as the amount of compound interest earned in one year. Interest rate only accounts for interest earned on the original amount.
What is the difference between dividend rate and APY? ›
APY – expected earnings
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.
What is the difference between apye and APY? ›
This is an annualized rate that factors in both the average balance of the account and the dollar amount of dividends paid over the specified time period. Unlike APY, APYE is impacted by both deposits and withdrawals made during the time period reflected in the statement.
What is the difference between dividends and interest? ›
In summary, interest and dividend represent different concepts and financial outcomes in the world of finance and investing. Interest is the cost of borrowing or the return earned on debt investments, while dividends are the portion of profits distributed by companies to their shareholders.
What is the APYE rate? ›
APYE (annual percentage yield earned) reflects the total amount of dividends actually earned for the dividend period stated as a percent of the actual average daily balance in the account. The APYE is affected by the deposits and withdrawals from the account and may be different than the APY.
Is there a difference between interest rate and APY? ›
Both are expressed as percentages. The key difference between APY and interest rate is compound interest. APY includes interest that's earned on the original balance as well as the amount of compound interest earned in one year. Interest rate only accounts for interest earned on the original amount.
What is the difference between interest rate and dividend yield? ›
It includes investor earnings, such as interest and dividends received by holding particular investments. Yield is also the annual profit that an investor receives for an investment. The interest rate is the percentage charged by a lender for a loan.
How to calculate dividend rate and APY? ›
APY = 100 [(1 + Dividends/Principal) (365/Days in term) −1]. “Principal” is the amount of funds assumed to have been deposited at the beginning of the account. “Dividends” is the total dollar amount of dividends earned on the Principal for the term of the account.
What does 5.00% APY mean? ›
A 5% APY means your money earns 5% interest per year. If you deposited $100 in an account that compounds annually, you'd have $105 at the end of a year. But accounts may compound monthly, weekly, daily or even continuously. The more frequent the compounding periods, the more interest you earn.
Which bank has the best APY rate? ›
Best High-Yield Savings Account Rates
- My Banking Direct – 5.55% APY.
- Poppy Bank – 5.50% APY.
- BrioDirect – 5.35% APY.
- Vio Bank – 5.30% APY.
- Ivy Bank – 5.30% APY.
- TAB Bank – 5.27% APY.
- TotalDirectBank – 5.26% APY.
- Jenius Bank – 5.25% APY.
Common examples of interest and dividend income include interest earned on a savings account and dividend earnings from stock and mutual funds. Interest income is typically reported to you on Form 1099-INT (Interest) or Form 1099-OID (Original Issue Discount).
What is a good dividend rate? ›
What Is a Good Dividend Yield? 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.
Is APR the same as dividend rate? ›
The annual percentage rate (APR) entails the interest accumulated yearly for money rendered as credit by a creditor to the debtor. On the other hand, the dividend rate represents proportions entitled to company owners from the total amount of income realized in a company within a specified period.
Is APY and dividend rate the same? ›
The annual percentage yield (APY) refers to the amount of money you earn on a credit union or bank account over one year through dividends or interest. Unlike the dividend/interest rate, APY takes into account compound earnings. So each time you time earn dividends/interest, those earnings are adding to your balance.
What is 3.5% APY on $1000? ›
Using simple math, let's say a financial institution is offering a high-yield savings account that pays 3.5% APY annually, and you open an account with a $1,000 deposit. In that case, you could compute the interest as $1,000 x 0.035 x 1 = $35.
What does 7% APY mean? ›
APY, meaning Annual Percentage Yield, is the rate of interest earned on a savings or investment account in one year, and it includes compound interest. To help people compare accounts and get an accurate estimate of possible earnings, banks are required to prominently display account APYs.
Which is better dividend or yield? ›
Investors often face a choice between Dividend Growth stocks and High Yield stocks when seeking income-generating investments. While High Yield stocks offer attractive immediate returns, Dividend Growth stocks provide superior long-term benefits, including income growth, capital appreciation, and lower volatility.
