Dividends vs Capital Gains

Difference Between Dividends vs Capital Gains

Investors earn the return on investment in terms of dividend and capital gain. Both dividend vs capital gain help in building wealth. Dividend and Capital gain both are different from each other but both benefit the investor. Let’s see Dividend vs Capital gain briefly.

Dividends

A dividend is periodical interest payment to an investor when the investor is holding stocks. A dividend is not exactly interesting it is the reward from company to the investor which is part of earning of a company. Dividends are decided by a board of directors of the company and it is approved by voters. Dividends are paid with payout rate and same is paid to an investor as per schedule frequency which could be yearly, quarterly, monthly. The dividend also paid to attract investor but there is a limited period defines by each company for which investor has to hold stocks. A dividend can be paid in form of cash, stocks and these two ways commonly used.

Let’s take an example where an investor has invested $1,000 in 2017 in the stock of HIL Limited and got 100 stocks, the price of one stock is $10. After one-year company declared a profit of $100 Million and decide to give a dividend of $2 per share. So, investor got $200 as dividend over his investment by the company.

The dividend has an impact on share price too as payment of dividend leads to the flow of fund from company’s book. Suppose company trading at $50 on a particular day same day company declares its dividend as $5, as news in the market leads to an increase or decrease trading price. Here, also after an announcement of news stock price of the company will increase and may hit to $57 but after payment of the amount as company’s book decrease with the total amount of dividend paid share price decrease and reach to $51.

A decision of payment of dividend is may or may not depend on the performance of a company, if a company is undergoing financial problem it may possible it will not give a dividend to investor and if a company is performing well then also it may possible it will not give a dividend to the investor.

Capital Gains

When the investor sells its investment from more than its original amount purchase the difference between the two is called capital gain. A capital gain can be short term or long term. Short term means term in one year or less and long-term means term more than one year.

Capital gain is profit earn from capital assets. With an increase in the value of assets accounts to profit for its investor, but until such time said profit is unrealized as the asset is still with the investor and he hasn’t taken the benefit of rising in price yet. Once an investor sells his assets the positive difference of price will be capital gain, which is the profit of investor.

Capital gains are liable for tax if invested for short-term whereas if an investment is in long-term tax liability will be different. This is subject to a type of investment.

Let’s see an example to understand capital gain.

An investor has invested $1,000 in 2017 in the stock of HIL Limited and got 100 stocks, the price of one stock is $10. Now, after one year he was in need of money and wanted to sell its stocks at that time HIL limited was trading at $20. He sells his 100 shares and earns $2,000. As his purchase price was $1000. Then profit will be:-

= $2000 – $1000

= $1000

So, the capital gain will be $1000 without taxes. Value of capital gain is increase with time but it is subject to market condition.

Head To Head Comparison Between Dividends vs Capital Gains (Infographics)

Below is the top 8 difference between Dividends vs Capital Gains

Key Differences Between Dividends vs Capital Gains

Both Dividends vs Capital Gains are popular choices in the market; let us discuss some of the major Difference Between Dividends vs Capital Gains:-

• A dividend is profit percentage given bay company to investor whereas Capital gain in s profit made after selling of investment.
• Dividends paid on periodical basis depend on company policies whereas capital gain is realized when investment is sold any investor.
• Dividend depends on the decision of senior management and decided by voting whereas capital gain is attained by a market situation or my macroeconomics factors that influence the market.
• In dividend taxes, a charge is low as income is normal whereas in capital gain taxes are high but it depends on investment term which can be short term or long term.
• In dividend part of company profit distributed to shareholders whereas in capital assets value increases in long-term.
• The dividend has relatively less investment required for purchasing stocks whereas, in capital gain, a large investment is required to get a higher capital gain.
• Dividend distributed on periodical basis depends on company policies whereas capital gain happens once in a lifetime of an investment.
• In dividend, the investor cannot control dividend as it is decided by company management whereas Capital gain can be controlled by investor by selling at the time when prices are high.
• Dividend gives a steady income whereas capital gain is converting stock/assets into cash.

Dividends vs Capital Gains Comparison Table

Below is the 8 topmost comparison between Dividends vs Capital Gains

Conclusion- Dividends vs Capital Gains

Dividend vs capital gains is the tool to generate income of investor. Amount earn can be changed subject to change in the market situation and also attracts taxes. So, while investment these points need to keep in mind. Dividend vs capital gains help to earn money in long earn and differences within the financial plan will help to utilize the money efficiently in the long run.

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