What is the difference between dividends and interest?

As the trend of investing and saving in SACCO societies continues to gain momentum in Kenya, it becomes essential for individuals to grasp the fundamental disparities between dividends and interest, two terms often used interchangeably but with distinct meanings and implications.
Interest pertains to the earnings accrued by lending money. Whether it’s an individual, entity, or corporation seeking a loan from creditors like Mombo SACCO, interest is the additional sum paid alongside the borrowed amount. Conversely, when individuals deposit funds in a SACCO, they receive “interest” as compensation for allowing the SACCO to utilize their money.
In contrast, dividends represent a share of the profits distributed by the SACCO to its shareholders. They signify the individual’s portion of the SACCO’s earnings. Unlike interest, dividends do not entail a contractual obligation, nor are they guaranteed. The payment of dividends is contingent upon the SACCO’s financial performance and is subject to fluctuation.
Differences between Interest and Dividends
- Nature of Payment
Interest is the cost incurred for borrowing money, while dividends are a portion of the profits disbursed to shareholders.
- Basis of Calculation
Interest is calculated based on the amount of money lent, whereas dividends are determined as a percentage of the SACCO’s profits.
- Payment Obligation
Regardless of the company’s financial status, interest must be paid to creditors. Conversely, dividends are distributed only when the SACCO generates profits.
- Recipient of Payment
Interest is paid to lenders or creditors, while dividends are disbursed to shareholders.
- Impact on Company Finances
Interest influences the company’s profitability directly, as it affects the bottom line. In contrast, dividends determine the allocation of profits for reinvestment or distribution to shareholders.