How Do Credit Union Dividends Work?
1. Introduction: Credit Unions are different from banks because the customers own them, thus why they pay dividends to their customers
While banks are for-profit enterprises, credit unions are non-profit and are owned by their members (“member-owned”). The purpose of the credit union then is to serve the best interests of its members/owners/customers, who are all one and the same, not to maximize profits for owners, like in a for-profit corporation.
2. Credit Union dividends are the payout of profits of the credit unions to its members/owners/customers
When credit unions make a profit they payout a share of that profit to their members/owners, called a dividend.
Whether in a credit union, for-profit or other context, dividends are a payout of a share of an organization’s profits to its shareholders.
Since the shareholders of a credit union are also its customers/members, credit unions payout their profits in the form of a dividend to their customers.
This is why you will often see the terminology used by credit unions is a little different than what is typically used by banks. Often, instead of seeing an interest rate on a savings account, you might see it called a share account or something similar.
3. Different credit unions pay these dividends out in different ways, make sure to do your research
Each credit union will calculate how much they pay each member a little differently. Most credit unions will pay based on a rate assigned to the number of average deposits you kept with that credit union over the dividend period in accounts like savings accounts, checking accounts, and CDs. Functionally, this ends up being quite similar to how a regular bank pays an interest rate on deposit accounts as well.
The credit union may pay a higher dividend rate depending on the type of account and how much money on average was kept there over the relevant period.
Typically, but not necessarily always, we see checking accounts paying the least, savings accounts in the middle, and CDs paying the highest dividend rates.
4. There are some benefits to the dividends you get from credit unions, but …
Typically, the dividend rate paid out by credit unions will be a bit higher than the interest rates
In addition to dividends, some people believe that there are additional benefits to being a member of a credit union, instead of a customer of a bank. Usually, they claim that credit unions offer better customer service and better rates on both the deposit and borrowing side. They may also claim that the credit union’s incentives are better aligned with its customers.
We like the incentives argument but don’t really buy the customer service to better rates argument.
We’ve reviewed enough of both credit unions and banks to see that there are good and bad actors in both camps on the customer service side. We can’t make a sweeping generalization that one or the other has better customer service, you have to look at the individual institution.
On the rates side, it’s true that credit unions tend to nudge out banks on average, but it’s usually by a de minimus amount.
For rates don’t the deposit side, remember, you’re usually making next to nothing in a savings account, checking account, or CD, which is why we don’t like them. We much prefer to use money market accounts at brokerages instead. For example, when we checked just now while writing this article, the average money market account was paying ~10x what the average savings account was paying across all institutions in the country (see here for money market rates).
Thinking about trying to get a better rate with a money market account instead?
Check out our cash management guide for Fidelity customers (the same principles can be applied to other brokerages):
5. … those benefits also come with some risks specific to credit unions
Although, credit union dividends are typically a small amount of money every year for most people, don’t forget that they are still taxable. You’ll need to declare these dividends as interest income on your tax forms.
General credit unions risks
While credit unions face much of the same risks as banks and are also highly regulated, they do tend to have less physical access, and fewer products and services, and we have generally seen that their technology stack is not always as modern and up-to-date as we would like.
6. Overall, we’re a fan of credit unions and the dividends they pay
We are a fan of credit unions in general but largely think that there is just not a huge difference in whether you use a bank or credit union for basic personal and small business financial services.
Both types of institutions will pay you a small amount to hold your money there, both generally offer similar products and services, and both are highly regulated, but can fail from time to time. Instead of joining a credit union just because it pays dividends, we tend to shop around a bit based on whatever we are trying to optimize for.
Frequently Asked Questions (FAQ)
What are typical credit union dividends?
Typically, they are less than 1% of the deposited amount, however, this rate changes daily with economic conditions. In some rare cases, they can range much higher, up to around 4%, however, this is usually done as a promotion and there is usually a cap on how much money that higher rate can apply to. The cap is typically in the $1K-$2K range, the rest of any additional deposits beyond that amount typically have the lower rate applied.
Consider that you may not want to keep very much money in an account that only earns this low of an amount. Since the federal reserve targets an inflation rate of 2% and historically it’s been 2% or higher, if you have money only earning 1%, you are simply locking in a loss in real dollars.
Does the credit union pay a dividend?
Most credit unions pay a dividend most of the time. However, since a dividend is just a share of the profits, it is not guaranteed to pay if the credit union is not profitable. Just like how any business works, if there are no profits to divide amongst the owner, there can be no dividend.
Additionally, not every account type at every credit union qualifies for a dividend. Different accounts may also qualify for different dividend rates. Make sure you understand carefully what you’re signing up for.
How often is a dividend paid?
Credit unions have the discretion to payout dividends, monthly, quarterly, or annually. Check with your specific credit union. The periodicity may also be different for different account types, so be sure to check that carefully as well.
How are dividends paid into your account?
Typically, they are deposited directly into your account with no additional action by you required. Some credit unions may still elect to let you receive your dividends by other means, such as by check or by deposit into another account, however, this has been going away as a cost savings measure and most credit unions only allow you to receive dividends directly back into the account where you received them.
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John has always been fascinated by money, wealth, and investing. He got a front-row seat into how Ultra High Net Worth individuals, families, and entities manage their money while working for years in Goldman Sachs’ Private Bank.
He learned a great deal about personal finance and wealth management from some of the most experienced professionals in the industry.
Now he enjoys helping all kinds of people grow their wealth and achieve their financial goals.
When he’s not advising clients, Cody enjoys playing golf and spending time with family and friends.