Difference Between Dividends and Capital Gains

The new generation has realized that income is not always earned through working hard or by getting a job, it can also be earned by other means, for example, by investing in shares, debentures, etc. but there are other means of getting incomes or gains that have been proven to be among best ways.

Dividends and Capital Gains are among the ways through which people earn a good amount of money. Both of them are similar, and therefore, for many, it becomes difficult to choose or differentiates among them.

Dividends vs Capital Gains

The difference between Dividends and Capital Gains is that both of them are earned from different sources. The dividend is given by investors from the profit that the companies have earned, whereas capital gain is the actual profit received by selling the capital or investment. While dividends are achieved on periodically basis that is mostly decided by the investors but the capital gain is not achieved periodically. Except these, they also differ in terms of the distribution period, investor control, taxes, and many more.

The dividend is the income received from the profit earned. It is given on a monthly or yearly basis. Therefore, the more the profit, the sooner dividend will be received. Investors do not have control over the dividend. They neither can reduce nor increase the amount of it nor can they refuse to pay it.

Capital gains are the amount of profit you’ll receive after selling the capital, assets, or investment. It has no relation or the profits earned by the business, and investors can affect the decisions. And there are some formalities and legal things that have to be taken care of before selling capital.

Comparison Table

Parameters of Comparison	Dividends	Capital Gains
Profit gained from	Company’s investor	After selling the capital
Control of investor	No control	Can have control
Distribution period	Periodic basis	Once in lifetime
Investment requirement	Comparatively less	High
Taxes	Lower	Higher

What are Dividends?

Dividends are paid equally among the shareholders belonging to the same class and are determined on a pre-share basis. The amount payable as a dividend has o be approved by the board of directors and then is paid on the payable date.

Steps of how dividend works:

1. Profits and retained earning is earned by the organization.
2. Management decides to distribute the extra profits to the shareholders.
3. The board of directors approves.
4. An announcement of the dividend is made.
5. The amount decided is paid as a dividend.

Dividends can be of several types. A few of them are listed below:

1. Cash: it is the most common way of paying the dividend as the amount calculated on the profit per shareholder is distributed in the form of cash to them. It can be made directly to the bank or in check or cash.
2. Stocks: new stocks of the number of dividends can also be issued to the investors instead of paying the direct cash. These are paid on a pro-rata basis.
3. Assets: company can also pay in some assets to the investors rather than issuing stocks or paying in cash. They can give them real estate or some physical assets.

There are other ways too for paying the dividend that may do not include immediate payment.

What are Capital Gains?

It is the gain when the capital or investment is sold or when the market value of capital increases the purchase value. It includes all the capital, not only stocks or investments.

Some people sell their capital in the market when the price is generally higher than the usual rate and gain higher profit from it. The capital gain can be of two types, they are:

1. Realized Gain: it is when the capital is selling at higher prices to the third party. It can further be divided in terms of long-term and short-term.
2. Unrealized Gain: it is when no sale is made, but the existing capital price increases in the market from the purchasing price.

Both of them are profitable to the investor, but the difference is that tax has to be paid on the realized gain as in this the actual cash or money is received whereas no such money is received in case of unrealized gain and therefore nor tax has to be paid, but it does affect the accounting books and financial statements.

It does not happen again and again and is considered to be once in a lifetime opportunity.

Main Differences Between Dividends and Capital Gains

1. Both of them are related and based on different things; dividends are periodic payments where the period is decided by the policy of the company, whereas capital gain is based on the price or amount investors are paying you in exchange for the investment of capital.
2. Both of them are affected by different factors; the dividend is based on the decision of top-level management of the company and by taking the votes, whereas factors that affect the capital gains are market forces and macroeconomic factors.
3. When compared in terms of taxes, the dividend has low taxes as incomes are not large, while the tax charged on a capital gain can be high or low as it will directly depend on the investment terms.
4. Investment requirement in case of dividend is low as the low amount can also be used for purchasing stocks, whereas to have a capital gain, a large amount of investment is required to gain more profit.
5. A person can receive divided every month or year depending on the company’s policy while having a capital gain happens mostly once in a lifetime. therefore, divided are steady incomes that you receive throughout the investing period, whereas capital gain can only be received once therefore is not a steady income.
6. Last but not least, they also differ in terms of investors control, there is no role of investors when it comes to dividends as this payment is decided by the management and not them, but the capital gain can be controlled by the investors as they can sell the investment or capital at a time of their convenience.

References

1. https://www.sciencedirect.com/science/article/pii/0047272780900377
2. https://meridian.allenpress.com/accounting-review/article-abstract/75/4/405/164044
3. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1991.tb03756.x
4. https://www.sciencedirect.com/science/article/pii/S1094202510000311