Dividend rate vs. APY: which savings number should you compare?
A dividend rate is the base rate; APY includes compounding and is the cleaner way to compare deposit accounts.
By Theo Nakamura · Staff Writer
· 4 min read
For dividend rate vs. APY, use APY to compare savings accounts, money market accounts, and share certificates. A dividend rate is the stated annual base rate a credit union uses to calculate what your deposit earns. APY, or annual percentage yield, turns that rate and its compounding into an annualized comparison figure.
Dividend rate is the calculation input. APY is the one-year comparison output. APY is designed to make deposit offers with different compounding schedules easier to compare.
Dividend rate vs. APY, side by side
- Dividend rate: The annual rate used to calculate earnings on a credit-union deposit. It fills much the same role as the interest rate on a bank deposit account and does not, by itself, show the effect of compounding.
- APY: Annual Percentage Yield, an annualized measure of deposit earnings that includes the stated rate and the effect of dividends compounding over a full year.
- Compounding: Earnings credited to the account become part of the balance. Later earnings can be calculated on both the original deposit and previously credited dividends.
- Best use: Use the dividend rate to understand the account's base calculation. Use APY to compare otherwise similar deposit products.
“Dividend” here has a credit-union meaning. It does not refer to a cash payment from a public company to a stockholder. Credit unions commonly use dividend rate where banks commonly use interest rate for deposits.
Why APY can be higher
Consider two accounts that each state a 3.00% annual rate. In a credit-union illustration, an account that compounds annually has a 3.00% APY. One that compounds monthly has a 3.04% APY. The difference comes from monthly credits earning additional dividends during the rest of the year.
A balance-level example
Another credit-union illustration starts with a $50,000 balance at a 2.23% dividend rate, with dividends credited monthly and left in the account.
- The credit union calculates and credits dividends each month under its account method.
- Each credited amount increases the balance used for later calculations.
- After 12 monthly credits, the example balance is about $51,126.47, or $1,126.47 of earnings.
- That one-year result corresponds to a 2.25% APY, slightly above the 2.23% dividend rate.
The example illustrates the mechanism, not a promise for every account. Account activity, fees, balance-calculation methods, and account terms can affect earnings. For some certificates, the advertised APY assumes dividends remain in the account until maturity.
How to compare deposit accounts
- Start with APY. A historic NCUA legal opinion describing the Truth in Savings framework calls APY the primary uniform measure for comparing share and deposit accounts.
- Compare like with like. Compare the disclosed APYs on accounts with similar terms.
- Read the account disclosure. Check how often dividends compound and are credited, how the balance is calculated, and whether account activity or fees can affect earnings.
- For certificates, check how dividends are handled. Whether dividends remain in the account affects compounding.
The exception: APY is not automatically higher
APY is often higher than the dividend rate when earnings compound within the account. A historic NCUA opinion says the prescribed APY calculation for noncompounding share certificates longer than one year can produce an APY below the stated dividend rate. Its examples included a five-year certificate with a 5.75% dividend rate and a 5.18% APY.
For a certificate, compare the disclosed APY among accounts with similar terms and read the disclosure for the treatment of dividends.
Keep APY separate from APR
APY applies to earnings on deposit accounts. APR, or annual percentage rate, concerns borrowing costs and can include interest and applicable finance charges or fees depending on the loan. Compare APY for savings products and review APR and loan disclosures for borrowing.
Frequently asked questions
Why can APY be lower than the dividend rate on a multiyear certificate?
A historic NCUA opinion explains that the prescribed APY calculation can be lower for a noncompounding share certificate with a term longer than one year. Compare disclosed APYs among certificates with similar terms and read the account disclosure for how dividends are handled.
How are APR and APY used differently?
APY measures annualized earnings on a deposit account, including compounding. APR concerns the annual cost of borrowing and can include interest and applicable finance charges or fees depending on the loan type.
Sources
- Dividend Rate vs APY - People Driven Credit Union — www.peopledrivencu.org
- Annual Percentage Yield | Visions Federal Credit Union — www.visionsfcu.org
- Explanation of APR, APY and Dividend Rate - BCU — help.bcu.org
- Annual Percentage Yield Calculations - NCUA — ncua.gov
