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

Investments are the most popular forms of wealth accumulation and expansion. Investments are assets or capital which is purchased with the intention of income generation. There are various types of investments and the most common type is stocks and equities; mutual funds and gold. Dividend and long capital gains are forms of investments with minimum risk factors involved in them.

Dividend vs Long-Term Capital Gain

The difference between dividend and long-term capital gain is that the capital the person invests to build their wealth is accumulated differently. The difference lies in the definition of terms itself. Both these financial investments are attained through acquiring stocks of companies as investments. The investor buys a stock of a company. When he sells the stock after 12 months for a higher price than he originally bought is called a long-term capital gain. Whereas the money he yields for stock during that period by the company is called the dividend.

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

Long-Term Capital Gain is a type of capital gain that is 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 Between Dividend and Long-Term Capital Gain

Parameters of ComparisonDividendLong-Term Capital Gain
DefinitionProfits authorized by board of directors.Profits acquired after selling of assets
Time Period for AcquiringIt is periodically distributed- quarterly, annually, or semi-annually.It profit can be realized only once i.e., by selling the asset/stock.
Factors Influencing The dividend distribution is in the hands of management of the company.The profit is subject to market fluctuations and situation. The liquidation rests in hands of investor.
Type of Income RealizationThe profit of company is distributed among the shareholders like a reward.The profit only generates an income when the investor sells the asset.
Amount of investment Dividend requires a huge sum of capital to buy the stocks.Comparatively less investment is done 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 major part of the profits is retained by the company. The companies regularly pay a dividend to their shareholders/investors to attract and maintain the investment even if they do not make a high percentage of profits.

There is a special 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 the regular dividends. This is usually 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 price of the stock and the situation of the company 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 in terms of 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 interval. 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 are different from dividends or short-term gain. 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 is to be held for a minimum duration of 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. Whereas long-term capital gain is defined as the profit acquired by the individual 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 long term is in the hands of investors realized only once through the selling of assets.
  3. Factors influencing– The dividends are in the control of the board of directors of the company and shareholders’ decisions who 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 as the part of earning as a shareholder of the company. The long-term capital gain is an income type where the original value of the asset 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.

Conclusion

Both dividend and long-term capital gains are sources of income for the investors. They can be either periodic as is the case of a dividend or at the will of the investor after 12 months. The stocks in the case of long-term capital can be either liquidized into cash or reinvested. The dividend can be received in form of cash or further assets of the particular investment. The tax schemes for the two are also different. A dividend is treated is practically treated as a short-term capital gain and taxed higher whereas the long-term capital gain taxed at 10% or 15% rates. As is the case with most assets in the US which are treated as capital gains.

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

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