Difference Between Dividend and Long Term Capital Gain (With Table)

Today investors are allowed and have the eligibility to get breaks on tax from their income from investment which they get. In long-term cases, there is a benefit of gaining capital from rates that are lower than tax, and some of the dividends also get treatment of preferential tax. Both these are tax-favoured incomes that people use widely today.

Dividend vs Long Term Capital Gain

The difference between a dividend and long-term capital gain is that a dividend is actually the percentage of profit earned by investors when given by a company. On the other hand, the long-term capital gain is the profit made after the investment made by an investor is sold.

Dividends are said to be paid to an investor with the rate of payout as per the schedule that could be monthly, quarterly, or even yearly. The dividend is paid to an investor in order to bring an attraction to him towards the company. But this happens only for limited timing when an investor can hold on to stocks.

Long term capital gain is the profit a person earns from the assets of the company’s capital. The increase in the value of an asset is directly proportional to the profit of an investor. This takes place only when the profit is realised, or the asset would still remain with the investor without taking any profit from the rising price.

Comparison Table Between Dividend and Long Term Capital Gain

Parameters of comparisonDividendLong Term Capital Gain
MeaningA dividend is actually the percentage of profit earned by an investor when given by a company. Long-term capital gain is the profit that is made after the investment made by an investor is sold.
When it is paidA dividend is usually paid periodically depending on when the company goes through profit. Long-term capital gain the profit is earned only after a year by the investor.
Decided byThe dividend percent is decided by the senior manager of the company. Long-term capital gain is decided based on the market situation and price.
Tax rateThe tax rate is low. The tax is high.
Investment to be madeA dividend has less amount investment to be made. Long-term capital gain requires a large amount of investment to be made.
When it is distributedA dividend is distributed to a person on a periodical basis. Long-term capital gain is given only once in the lifetime of an investment.
ControlIn the case of dividends, an investor has no control as the managers of the company decide it. Long-term capital gain is controllable by the investor by selling the stock when the market value is high.
ConversionThe dividend has the ability to give constant income. Long-term capital gain has the ability to convert stocks into cash.

What is Dividend?

Dividends are said to be paid to an investor with the rate of payout as per the schedule that could be monthly, quarterly or even yearly. The dividend is paid to an investor in order to bring an attraction to him towards the company. But this happens only for limited timing when an investor can hold on to stocks.

A dividend is usually paid in multiple forms such as cash and stocks, which are the most common ways used today. The decision of whether or not to pay off the dividend may depend on how the company has performed or whether your company is undergoing financial losses or profits. If the company goes through a loss, and the investor will not be able to get his dividend as such.

What is Long Term Capital Gain?

Long term capital gain is the profit a person earns from the assets of the company’s capital. The increase in the value of an asset is directly proportional to the profit of an investor. This takes place only when the profit is realised, or the asset would still remain with the investor without taking any profit from the rising price.

In short, when an investment is made by an investor for a company for more than one year, then the profit and investor gets out of it is said to be a long term capital gain. A person has to pay the tax while selling the stock. This also gives the investor higher chances of gaining more profit.

Main Differences Between Dividend and Long Term Capital Gain

  1. A dividend is actually the percentage of profit earned by an investor when given by a company, and, on the other hand, long term capital gain is the profit that is made after the investment made by an investor is sold.
  2. A dividend is usually paid usually on a periodic basis depending on when the company goes through profit, whereas in long term capital gain, the profit is earned only after a year by the investor.
  3. The dividend per cent is decided by the senior manager of the company, whereas the long term capital gain is decided based on the market situation and price.
  4. The tax rate is low with normal income in dividend, while the tax rate is high in long term capital gains.
  5. A dividend has less amount investment to be made, and on the other hand, a long term capital gain requires a large amount of investment to be made.
  6. A dividend is distributed to a person on a periodical basis, whereas, in the case of long term capital gain, it is given only once in the lifetime of an investment.
  7. In the case of dividend, there is no control by an investor of it as it’s decided by the managers of the company while, in the case of long term capital gain, it is controllable by the investor by selling the stock when the market value is high.
  8. The dividend has the ability to give income that is constant, whereas long-term capital gain has the ability to convert stocks into cash.

Conclusion

Dividends and long term capital gains are observed to be two of the most wealth-prospered tools present in the stock market today. Either there is a rise in investment due to the rise in price bought by the appreciation of capital, or the companies pay out dividends from their own profits to investors. 

Dividends are not the actual payments made of the interest rate, as they actually damage the stock price after they are distributed. Now an investor receives this income immediately. Because of both these tools today, many people invest in stocks of companies, which benefit both the companies as well as the person who invested in their company.

References

  1. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1982.tb03598.x
  2. https://www.oecd-ilibrary.org/taxation/taxation-of-dividend-interest-and-capital-gain-income_5k3wh96w246k-en
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