Dividend vs Long-Term Capital Gain: Difference and Comparison

Investments are the most popular forms of wealth accumulation and expansion. Investments are assets or capital purchased with the intention of income generation.

There are various types of investments; the most common type is stocks and equities, mutual funds, and gold. Dividends and long capital gains are forms of investments with minimum risk factors involved in them.

Key Takeaways

1. Dividends are payments made by a company to its shareholders from its profits, while long-term capital gains arising from selling an asset held for more than one year.
2. Dividends are paid out regularly, while capital gains are realized when the asset is sold.
3. Dividends are taxed at a different rate than long-term capital gains and have different reinvestment rules.

Dividend vs Long-Term Capital Gain

Dividends represent a portion of a company’s profits distributed to its shareholders, paid out in cash or additional shares of stock. Long-term capital gains occur when an investor sells a capital asset for more than its purchase price after holding it for more than one year.

The term dividend means the payments made by the company to the shareholders of the company for their investments. It could be paid for investments in mutual funds and exchange-traded funds.

This originates from the profits of various investments made in companies or mutual funds.

Long-Term Capital Gain is a type of capital gain acquired only when an investment/stock is sold after 12 months at a price higher than the original purchasing price.

The capital gain is thus the difference between the original purchasing price and the selling price.

Comparison Table

Parameters of Comparison	Dividend	Long-Term Capital Gain
Definition	Profits authorized by the board of directors.	Profits acquired after selling off assets
Period for Acquiring	It is periodically distributed- quarterly, annually, or semi-annually.	Its profit can be realized only once, i.e., by selling the asset/stock.
Factors Influencing	The dividend distribution is in the hands of the management of the company.	The profit is subject to market fluctuations and situations. The liquidation rests in the hands of the investor.
Type of Income Realization	The profit of the company is distributed among the shareholders as a reward.	The profit only generates an income when the investor sells the asset.
Amount of investment	A dividend requires a huge sum of capital to buy the stocks.	Comparatively, less investment is made while purchasing.

What is Dividend?

The dividend is a profit percentage acquired periodically as a reward by the company. The dividend is either paid in cash or through more stocks. However, a significant part of the profits is retained by the company.

The companies regularly pay their shareholders/investors dividends to attract and maintain the investment even if they do not make a high percentage of profits.

There is a particular type of dividend called the non-recurring special dividend. This means that companies’ extra dividends are associated with special or specific events of assets of the company.

This dividend is comparatively larger than regular dividends. This is once a type of income. The dividends are paid at regular intervals in a year, whether quarterly, annually, or semi-annually.

The profits are paid out depending on the stock price and the company’s situation in the market scenario. The investor is eligible for dividends only if the stock was acquired before the ex-dividend date.

A dividend is categorized into two- ordinary and qualified. Ordinary dividends are taxed low as they depend on income, whereas the qualified dividend is understood as capital gains making taxes higher.

Reputed companies with more predictable profits give better dividend pay-out. A dividend is a steady mode of income for the investors as dividends are mostly recurring, keeping the investors.

What is Long-Term Capital Gain?

The term capital gain implies the profit acquired from selling an asset. Here, asset means stocks, exchange-traded funds, property, mutual funds, etc.

The return from selling the asset at a higher price than the original is called a capital gain. Capital gain is categorized into two- long-term and short-term capital gains.

Long-term capital gain is the profit from selling an asset after one year or more.

There are no interests that are accumulated. The long-term capital gain is a one-time investment which yields no returns at regular intervals.

The selling of the asset/stock depends on the investor and the market situation rather than on the company or any other external influence.

The tax rules for long-term capital gains differ from dividends or short-term gains. The tax rate for long-term capital gain is lower than short capital or dividend.

This is because the income is not recurring. In the case of real estate, there are certain exemptions if the gains are reinvested.

In the case of gold investment, the asset will be held for at least 3 years. The asset value increases in one year or more.

For long-term capital gain, the investment required is comparatively less than the dividend. The income is only realized when the asset is sold, not before.

Main Differences Between Dividend and Long-Term Capital Gain

1. Definitions– The terms differ from each other in meanings. The dividend is defined as the profits realized by the company to the shareholders. At the same time, the long-term capital gain is the profit the individual acquires after selling his assets.
2. Period for acquiring– In the case of dividends, the profit is an appreciation given to its shareholders periodically- monthly, quarterly, annually, or semi-annually. However, the capital gain in the long term is in the hands of investors and realized only once by selling assets.
3. Factors influencing– The dividends are in the control of the company’s board of directors, and shareholders’ decisions determine the pay-out period and rate of interest. The long-term capital gain is subjected to the market situation and fluctuations. They are in the hands of an investor to determine the time of realization.
4. Type of income– The dividend is considered part of earnings as a company shareholder. Long-term capital gain is an income type where the asset’s original value is increased over time.
5. Amount of investment– The dividend requires a large sum of investment to buy stocks/equities of a company. Here, the long-term capital contrasts the dividend as comparatively less capital is required for purchasing the asset.

References

1. https://books.google.com/books?hl=en&lr=&id=9G6H70WdBFoC&oi=fnd&pg=PP1&dq=dividend+meaning&ots=jOTJ-oigiC&sig=SFB1nm5MSQo9R6WaUhw1GJjH9bo
2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/arzjl1985&section=34

Last Updated : 11 June, 2023