Interest or dividend - which is best?

ShinyStarlight1

Which is a better way of topping up your living costs: 

Using the interest on your savings

or

Investing in something that pays a dividend.


Assuming, for arguments sake, that both pay the same.

jaypers

Interest bearing accounts are usually risk free so if they pay the same as an investment it would be better as investments carry risk. The right answer is to have a  combination of both with your investments weighted against your attitude to risk. Investments generally have a higher return and should be approached with the long term in mind. Funds are a good option, giving you a selection of equities wrapped into a single offering. Again there are numerous options to choose from giving a full range of risk variations so research well. 

DullGreyGuy

If its savings then the capital isn't at risk, interest is generally guaranteed but interest is all you get. 

Buying shares puts your capital at risk, dividends aren't guaranteed but clearly as well ask the risk of the shares crashing in value they can also explode. 

What's best depends on your situation, time horizon and your overall strategy. 

jimjames

ShinyStarlight1 said:

Which is a better way of topping up your living costs: 
Using the interest on your savings or Investing in something that pays a dividend.
Assuming, for arguments sake, that both pay the same.

Assume both pay the same now and in 10 years time, say 5% on £10,000. No guarantees but with the savings they will still be worth the same, hopefully the investment will have increased so even if the % amount is the same the actual income will have risen. 

Savings are still £10k so still paying £500.
Assume Investment has risen in value to £15k so Dividend is now £750 per year.

So over the long term the dividend paying investment should be the better way but isn't guaranteed. Some dividend paying investment trusts have very long (50 year plus) records of increasing dividends.

sevenhills

ShinyStarlight1 said:

Which is a better way of topping up your living costs: 

Using the interest on your savings
or
Investing in something that pays a dividend.

Assuming, for arguments sake, that both pay the same.

Topping up your living cost implies short term, so a savings account sounds best for you.

But over the long term, shares pay more, in no way do they pay the same.

dales1

The taxation is different as well.

Above the zero-rate interest allowance (£1,000) a BR payer will pay 20% and an HR payer will pay 40%.

Above the zero-rate dividend allowance (£500) a BR payer will pay 8.75% and an HR payer will pay 33.75%.

Hoenir

How much capital can you afford to lose? 

AlanP_2

sevenhills said:

ShinyStarlight1 said:

Which is a better way of topping up your living costs: 

Using the interest on your savings
or
Investing in something that pays a dividend.

Assuming, for arguments sake, that both pay the same.

Topping up your living cost implies short term, so a savings account sounds best for you.

But over the long term, shares pay more, in no way do they pay the same.

There are thousands of people that use dividends to provide an income over long periods, how is that short term?

sevenhills

AlanP_2 said:

There are thousands of people that use dividends to provide an income over long periods, how is that short term?

Using dividends can be tax-effective, but that doesn't sound like the OPs reasoning. The OP needs to return and give us more info.

ShinyStarlight1

sevenhills said:

AlanP_2 said:

There are thousands of people that use dividends to provide an income over long periods, how is that short term?

Using dividends can be tax-effective, but that doesn't sound like the OPs reasoning. The OP needs to return and give us more info.

It was really a question I didn’t know the answer to myself. I knew there must be a reasoning why people would choose one over the other but couldn’t work out why. As I don’t currently have an income, but do have money to save/invest it felt quite an important question to understand.

EthicsGradient

It's not a question that's easy to realistically answer with the one thing that you've specified: "Assuming, for arguments sake, that both pay the same".

So does that mean "assuming there is a share that currently pays about 5% dividend per year but never grows (or shrinks) in share price"?

That could be discussed from a tax point of view, but it's very unlikely you'll find such a beast. There would certainly be no guarantee that it would continue to behave like that, nor that its dividend will track interest rates in the future.