Dividend rate vs APY: what's the difference?

Why a savings account pays "dividends"

At a credit union, you're a member-owner, and your savings account is technically a "share" account. So instead of interest, the credit union pays dividends. The name is different; the money works just like interest, and it's taxed as interest income, not at the lower stock dividend rates.

This is a different thing from stock dividends, where a company shares profits with shareholders.

Dividend rate vs APY in one sentence

The dividend rate is the simple annual rate. The APY (annual percentage yield) is what you actually earn in a year once compounding is included. APY is always equal to or a bit higher than the dividend rate.

APY = (1 + dividend rate ÷ n)^n − 1, where n = number of compounding periods per year

Worked example: a 4.00% dividend rate

On $10,000 at a 4.00% dividend rate compounded monthly, you'd earn about $407 in the first year, slightly more than the $400 the headline rate suggests. Compounding more often helps, but the gap between monthly and daily is tiny.

Which number should you compare?

Always compare APY. Two accounts with the same dividend rate can have different APYs if they compound differently, and federal Truth in Savings rules require institutions to disclose APY so you can compare fairly across banks and credit unions.

Things that change what you actually earn

• Variable rates: savings and money market rates can change at any time; certificates usually lock in a rate for the term.
• Balance tiers: some accounts pay the advertised rate only on part of your balance.
• Early withdrawal penalties: on share certificates (the credit union version of a CD), withdrawing early can cost several months of dividends.
• Taxes: dividends from credit unions are reported on Form 1099-INT and taxed at ordinary income rates.
• Insurance: deposits at federally insured credit unions are covered by the NCUA up to $250,000 per member, per ownership category, similar to FDIC coverage at banks.

Savings dividends vs stock dividends

Savings dividends are for safety and short-term money. Stock dividends are for long-term growth and income. If you're comparing the two for a long-term goal, our dividend calculator shows how a growing stock dividend compounds over time.