When comparing savings accounts, money market accounts, certificates, and other deposit products, you may see both a dividend rate and an Annual Percentage Yield (APY). These numbers are related, but they are not the same.
The dividend rate is the base rate used to calculate your earnings. APY shows how much you could earn over a year when the effect of compounding is included. Understanding the difference can help you compare accounts more accurately.
What is an interest rate or dividend rate?
An interest rate is a percentage used to calculate interest earned on a deposit or charged on a loan. Banks commonly use the term “interest rate” for deposit accounts.
At a credit union, you will commonly see the term dividend rate for savings accounts, money market accounts, and certificates. The dividend rate is the annual rate used to calculate dividends on the account and does not reflect the effect of compounding.
For example, if a credit union savings account has a 3.00% dividend rate, that 3.00% is the base rate used to calculate the dividends your balance earns.
What is Annual Percentage Yield (APY)?
Annual Percentage Yield, or APY, shows the amount an account can earn over a year based on the dividend or interest rate and the effect of compounding.
Compounding occurs when dividends that have already been credited to your account begin earning additional dividends. Depending on the account, dividends may compound daily, monthly, or at another frequency specified in the account disclosure.
Because APY accounts for compounding, it is usually more useful than the dividend rate when comparing deposit accounts from different financial institutions.
Dividend rate vs. APY
Here is the easiest way to think about the difference:
- Dividend or interest rate: The base annual rate used to calculate earnings. It does not reflect the effect of compounding.
- APY: The annualized yield that reflects the rate and the effect of compounding, based on the applicable APY calculation.
For example, an account with a 3.00% dividend rate compounded monthly would have an APY of approximately 3.04%. The dividend rate stays at 3.00%, but compounding increases the annual yield.
Why should you use APY when comparing savings accounts?
APY gives you a standardized way to compare the earning potential of savings accounts, money market accounts, and certificates.
Two accounts can have the same dividend rate but different APYs if their compounding terms differ. Looking at APY makes it easier to compare accounts using the same annual measurement.
Dividend rate vs. APY example
| Account | Dividend rate | Compounding | APY |
| Account A | 3.00% | Annual | 3.00% |
| Account B | 3.00% | Monthly | 3.04% |
Both accounts have the same 3.00% base rate. Because Account B compounds monthly, its APY is slightly higher. This illustrates why APY is useful when comparing deposit accounts.
What is the difference between APY and APR?
APY and APR measure two different things.
APY is used with deposit accounts and helps you compare how much your money may earn. Annual Percentage Rate (APR) is used with loans and other forms of credit and helps you compare borrowing costs. Depending on the type of loan, APR may include the interest rate and certain fees or finance charges.
In simple terms, use APY when comparing deposit accounts and APR when comparing loans.
Frequently asked questions
How often are dividends compounded?
The compounding frequency depends on the account. Dividends may compound daily, monthly, or at another frequency. Review the account’s disclosures for the specific compounding and crediting terms.
Why is the APY higher than the dividend rate on a certificate?
The dividend rate is the base annual rate used to calculate earnings. APY reflects the annualized yield after taking applicable compounding into account. When dividends compound during the year, the APY may be higher than the stated dividend rate.
What is the difference between APY and APR?
APY applies to deposit accounts and measures annual earnings based on the account’s rate and applicable compounding. APR applies to loans and measures the annual cost of borrowing based on the interest rate and applicable finance charges. Use APY to compare deposit products and APR to compare loans.
Does compounding frequency make a difference?
Yes. More frequent compounding can increase the amount an account earns because previously credited dividends can begin earning additional dividends sooner. The difference may be small over a short period, but it can become more noticeable over time or with larger balances.
When comparing accounts, should I look at the dividend rate or APY?
APY is generally the better number for comparing the earning potential of deposit accounts because it provides a standardized annual measurement that accounts for applicable compounding.
Explore savings options at People Driven Credit Union
People Driven Credit Union offers savings accounts, money market accounts, certificates, and other options designed to help members save toward their financial goals.
Explore our Member Savings Account, compare our savings and certificate options, or open an account.
