Do CDs Pay Interest or Dividends?

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Quick Answer

CDs from a bank pay interest, not dividends. Share certificates from credit unions may say they pay dividends, but these dividends function like interest. Both CDs and share certificates pay a fixed return over a fixed term, regardless of terminology.

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Certificates of deposit (CDs) pay interest, not dividends. Some financial institutions—including credit unions and savings and loan associations—advertise "dividends" on their versions of a CD, called a share certificate. For you, as an account holder, these dividends are essentially the same as interest. To clarify further, here's more on how interest and dividends work when you're shopping for a CD.

Do CDs Pay Interest or Dividends?

CDs pay interest. At banks, the annual percentage yields (APYs) on CDs are consistently expressed in terms of interest.

Credit unions use different terminology. Unlike a bank, a credit union is a member-owned cooperative. When you join a credit union and open an account, you become a shareholder. At credit unions, CDs are often called share certificates, in part to honor the idea that credit union account holders are partial owners of the institution. The money you earn from a share certificate is often referred to as a dividend, but it works the same as bank interest on a CD. It's also treated as interest on your federal tax return.

Interest Rate vs. Dividend Rate

Interest rates on CDs and dividend rates on share certificates are basically the same thing. Both terms refer to the annual return on your deposit. With both CDs and share certificates, the return you receive is predetermined when you open your account. CDs pay a return over a fixed period of time: For example, a 12-month CD might pay a 4.00% return at the end of one year.

For the most part, interest rates apply to CDs and dividend rates apply to share certificates, but you may occasionally see the terms used interchangeably. In any case, interest and dividends on these accounts are paid—and taxed—alike.

Learn more: How Are CDs Taxed?

Factors That Determine CD Rates

Interest rates can vary from one CD to the next, and from one institution to the next. Finding the best return on your money is one of the best reasons to shop around for a CD. Here are a few factors that influence how much interest a CD might pay.

  • Federal Reserve rates: The Federal Reserve's Federal Open Market Committee meets eight times a year to set the federal funds rate, the rate commercial banks use when they lend to each other. Although the federal funds rate doesn't dictate interest rates at consumer banks and credit unions, it influences them indirectly. When the Fed's rate is high, interest paid on credit cards and loans, as well as interest earned on savings accounts, tends to be higher.
  • Inflation expectations: When financial institutions set CD rates, they also consider how inflation and interest rates might change throughout the account's term. During inflationary times, the Fed typically raises interest rates to discourage borrowing and attempt to cool rising prices. In turn, CD interest rates may rise when inflation is high.
  • CD term length: Longer-term CDs have historically paid higher interest rates than shorter-term CDs, generally as a reward for keeping your money tied up for longer. However, in some economic environments, the reverse may be true. If banks fear a recession will trigger lower interest rates, they may reward shorter-term CDs over three- or five-year terms. Either way, this is why three-month, six-month, one-year and three-year CDs at the same bank may all offer different interest rates.
  • Individual differences: Every financial institution has its own profit goals, operational costs and strategic or marketing objectives. Not-for-profit credit unions often try to maximize returns on accounts like share certificates as part of their members-first philosophy. Online-only banks can sometimes offer higher rates because their overhead is low. Banks and credit unions both may offer promotional rates on CDs or share certificates to attract new customers.

Learn more: How Much Interest Do CDs Pay?

How to Choose the Best CD

Choosing the best CD for you depends on your financial goals and how you plan to use your money. Here are a few action items when you're considering CDs:

The Bottom Line

Of the many considerations you'll make when choosing a CD, determining whether your account pays interest or dividends shouldn't be one of them. No matter how it's described, the money you earn on a CD or share certificate is essentially interest. Shop for the best terms, features and APY to find the CD that works for you.

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About the author

Gayle Sato writes about financial services and personal financial wellness, with a special focus on how digital transformation is changing our relationship with money. As a business and health writer for more than two decades, she has covered the shift from traditional money management to a world of instant, invisible payments and on-the-fly mobile security apps.

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