Difference Between Dividends vs Capital Gains
A dividend is a periodical interest payment to an investor when the investor is holding stocks. A dividend is not exactly interesting it is the reward from the 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. 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.
Dividends
Dividends are paid with payout rate and the same is paid to an investor as per schedule frequency which could be yearly, quarterly, monthly. The dividend also paid to attract investors 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, the investor got $200 as a dividend over his investment by the company.
The dividend has an impact on share price too as payment of dividends leads to the flow of funds from the company’s book. Suppose a 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 a company’s book decrease with the total amount of dividend paid share price decrease and reach to $51.
A decision of payment of the dividend is may or may not depend on the performance of a company, if a company is undergoing financial problem it may possibly it will not give a dividend to investors and if a company is performing well then also it may possibly it will not give a dividend to the investor.
Capital Gains
Capital gain is profit earn from capital assets. 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 the investor.
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Capital gains are liable for tax if invested in the short term whereas if an investment is in the 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 increases 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 differences:-
- A dividend is the profit percentage given by the company to investors whereas Capital gains in s profit made after selling of investment.
- Dividends paid on a periodical basis depend on company policies whereas capital gain is realized when investment is sold to any investor.
- Dividend depends on the decision of senior management and decided by voting whereas capital gain is attained by a market situation or 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 terms 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 dividends, the investor cannot control dividend as it is decided by company management whereas Capital gain can be controlled by the investor by selling at a 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
|
Dividend |
Capital Gain |
| A dividend is the profit percentage given by a company to the investor. | Capital gain is a profit made after selling of investment. |
| Dividends paid on a periodical basis depend on company policies. | Realized liquidation. |
| Depend on the decision of senior management. | Depend on the market situation. |
| Lower Taxes are charged. | Tax liability is high but it depends on investment terms which can be short-term or long-term. |
| Part of company profit distributed to shareholders. | Increase in value of long-term assets. |
| Relatively less investment required for purchasing stocks. | A large investment is required to get a higher capital gain. |
| Dividend distributed on a periodical basis. | Capital gain happens once in a lifetime of an investment. |
| The investor cannot control dividends. | Capital gain can be controlled by an investor. |
Conclusion
Dividend vs capital gains is the tool to generate income for investors. 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 the long earn and differences within the financial plan will help to utilize the money efficiently in the long run.
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This has been a guide to the top difference between Dividends vs Capital Gains. Here we also discuss the Dividends vs Capital Gains key differences with infographics, and the comparison table. You may also have a look at the following articles to learn more.
