- Interest and dividends are among the simplest and safest ways to earn steady investment income.
- Interest is money earned for lending your money and offers a guaranteed rate of return.
- Stock dividends are paid regularly by companies, but run the risk of being cut or suspended.
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There are a multitude of ways to try to make money in today’s markets, whether you’re investing in blue chip stocks, a money-market fund, or the latest cryptocurrency craze. There are also simpler and safer choices, such as interest and dividends.
Interest and dividends can both help investors tap into a steady stream of income while mostly avoiding the market
associated with riskier investments like stocks. Still, there are key distinctions between the two that are important to understand and that could affect your decision-making.
Interest vs. dividends: At a Glance
Both interest and dividends are ways investors can produce consistent income from their portfolios without having to actively manage their holdings. They do so in different ways.
- Interest: The cost of borrowing money, expressed as a percentage, that’s paid to the lender. It also represents periodic coupon payments offered to investors who buy debt securities such as bonds.
- Dividends: A portion of a company’s profits that it distributes at regular intervals to shareholders who buy partial ownership of a company through equity securities such as stocks. Also paid to consumers in the form of an annual percentage yield (APY) for those who store their money in checkings and savings accounts at a bank.
What is interest?
Most people are probably more familiar with the concept of interest as it relates to borrowing money in the form of a mortgage or auto loan.
When buying a car, a home, or some other big-ticket item, chances are you took out a loan that required you to pay interest, usually at an annual rate defined as a percentage. That interest is the cost of borrowing the money you needed to pay for that new Tesla or Apple MacBook Pro. That’s how banks earn money by lending.
It’s also how investors make money through interest. When you lend your money to a bank through deposits, in a basic savings account or certificate of deposit (CD), you earn interest on that money that is both guaranteed and protected by government agencies like the Federal Deposit Insurance Corp., or FDIC.
But interest can also be earned through …….