When you invest money in a company's stock, a security or a savings account, you may earn interest or dividends. If you earn dividends, you may determine the amount of money you earn each year using the dividend rate. However, if you earn interest, you must determine your earnings using the annual percentage rate.
The dividend rate is the amount of money you earn annually for your investment. To calculate the dividend rate, you must multiply the amount of money you receive in each payment by the number of payments you receive during the year. For example, if you own shares of stock and receive a dividend of $2.50 per share each quarter, the stock's dividend rate is $10 per share (2.50 x 4 = 10).
The APR is the percentage of your investment that you receive as profit during a year. For example, a savings account with an APR of 3 percent will pay you 3 percent of your investment as interest annually. Though the rate typically remains constant, the amount of money you receive each period does not. When the interest compounds, or is added to the principal, you begin earning interest on a larger amount of money, which increases your next interest payment.
Dividend Rate vs. APR
If you earn money from an investment based on a dividend rate, the money you earn per share during each period will remain the same as long as the dividend rate doesn't change. However, if you receive investment returns based on an APR, the amount of money you earn each period will increase as long as the APR is not adjusted lower.
If you receive returns based on an APR, the total amount of interest you will earn during the year depends on how often the interest compounds. Interest may compound daily, weekly, monthly, quarterly or yearly. Some companies may express dividend rates as a percentage of a stock's par value, or stated value. However, because par values don't change, the dividend paid per share remains constant even when the company expresses the rate in this way.