Dividends are generally cash payments distributed to owners of a stock. Companies are not required to issue dividends to their stock holders, but many companies decide to do so in order to create value and encourage ownership of their stock. Another way to view dividends is as a distribution of the company’s earnings to the company’s owners (share holders).
When a company earns a profit, it must decide what to do with its surplus cash. It can reinvest the surplus back into the company or it can distribute it to its shareholders in the form of a cash payment. Companies that would reinvest the money are usually younger companies that want to increase the value of the business by funding growth. These stocks are generally called growth stocks.
Once a company decides to pay out a dividend, it is allocated as a certain amount per share - such as $0.32 or $0.11. This creates the situation where the more shares of a stock that you own the greater payout you will receive from the dividend payment.
Savings accounts are financial accounts where consumers give their money to a consumer financial institution such as a bank or credit union in order to receive a financial return in the form of interest payments.
In most cases, money in a savings account is more difficult to access than money deposited in a checking account but offers a higher interest rate (often expressed in APY, annual percentage yield). A savings account holder must travel to an ATM or visit a bank teller in order to be able to access funds in their account. This is different from a checking account where one would be able to write a check or use a debit card to access the funds in their account.
Savings accounts also fall under US, Regulation D, 12 CFR 204.2(d)(2) which limits the number of transfers or withdrawals out of a savings account to six per month or a statement cycle of at least four weeks. Banks deal with breaches of the transfer limit in different ways with some banks charging the owner of the account a fee while others simply refusing to honor the transfer of funds. Be sure to read your accounts fine print to be sure how your bank handles this situation.
An interest rate is the cost or benefit associated with the lending of money. Where interest rates are concerned there are always a borrower and a lender. Borrowers pay interest while lenders receive interest payments.
From the perspective of a borrower, an interest rate can be considered the price that he pays to use money that he does not currently posses. The most common types of loans that the average person will encounter where he acts as the borrower include mortgages, car loans, student loans, and credit cards. In most cases these interest rates are expressed in terms of APR (Annual Percentage Rate).
If asked, very few average citizens might also consider themselves a lender - but that does not change the fact that almost every person lends their money out at interest. Savings accounts and interest bearing checking accounts are ways that most people engage in the benefits associated with the lending of money. These interest rates are often expressed in terms of APY (Annual Percentage Yield). Another method for average citizens to benefit from lending money is to engage in peer-to-peer (P2P) lending through the various avenues available (Prosper, Lending Club, and others).
Annual percentage yield (APY) can be seen as an accounts true interest rate. It is the percentage that indicates the true return of an interest rate over the course of a year when the benefits of compounding are considered. Most financial institutions that want their nominal interest rates to look higher will state the annual percentage yield for their account rather than the nominal interest rate, or Annual Percentage Rate (APR).
There is a rather straight forward equation used to calculate the annual percentage yield for an account. The equation is seen below:
The variables in this equation represent the corresponding ideas:
inom - this is the nominal interest rate for your account.
N - this is the number of compounding periods in a given year
The number that changes the most in this equation is the nominal interest rate. Banks decide what this rate will be and it often fluctuates depending on what the Federal Reserve has done with interest rates recently. Generally speaking, the lower the Federal Reserve has lowered interest rates the lower the nominal interest rate is going to be on your account.
The compounding period, however, is generally very stable. In most circumstances the compounding period will be daily, but interest will only be credited monthly.
Accounts That Use APY
- Savings Accounts
- Certificates of Deposit
- Checking Accounts
- Money Market Accounts