Dividend Rate vs APY: What’s the Difference?
While they may sound similar, it’s important to know the differences between Dividend Rate and APY, specifically with savings and investment accounts. These two metrics gauge the profitability of saving and investing your money. Let’s take a closer look at each term to better understand how your dividends are determined on your accounts.
What is a Dividend Rate?
Dividend Rate = Interest you earn as a dividend, typically over one year. This is a straightforward measure that doesn’t compound interest. For credit unions, the Dividend Rate essentially functions as the interest rate to give you an idea of the annual return on your deposit.
Example: If you invest in a $1,000 Share Certificate for a 1–year term that has a 2% Interest Rate, you’d earn $20 in dividends over that 1–year term ($1,020 total) if there was no compounding feature. ($1,000 x .02 = $20).
What is APY?
APY = Annual Percentage Yield = Interest you earn as a dividend, typically over a one-year period that compounds monthly. This gives you a complete picture of what you can earn on a savings account, share certificate, money market, or any other dividend-bearing investments. Think of this as the rate you would get after a year of your investment compounding.
Example: Using the same example above but with a compounding feature, you’d earn $1,020.18 in the same 1-year term.
How Does This Impact My Accounts?
While both Dividend Rate and APY are percentages, it’s important to look at the APY when making savings and investment decisions because it reflects the total amount of interest you earn on your money over time if you allow the dividends to compound. This will give you a more precise idea of how much interest you’ll earn within the year. Since your money compounds over time, that means you’re not just earning on your original deposit amount but also on the interest you’re earning over time.
APY gives you the full picture, while Dividend Rate gives you just a snapshot of your expected earnings. You’ll know what you can expect to earn, even when different accounts have different compounding frequencies. By gaining this understanding, you put yourself in a better position to meet your savings and investment goals.