Difference between Dividend and Capital Gain

Dividends and Capital Gains are two ways in which investors can earn returns on their investments, particularly in stocks and other securities. However, they represent different sources of income and are derived from different aspects of investment performance. Dividends are distributions of a company’s profits to its shareholders. Capital Gains, on the other hand, are the profits realized from the sale of investments such as stocks, bonds, or real estate.

What is Dividend?

Dividend is a portion of a company’s earnings or profits that is distributed to its shareholders. When a company earns profit, it can either choose to reinvest that profit into the business or distribute a portion of it to shareholders in the form of dividends. They are typically paid out regularly, such as quarterly or annually. However, some companies may pay them irregularly or not at all. Dividends are often seen as a sign of financial health and stability, as they indicate that the company is profitable enough to share its earnings with shareholders.

Dividends can be distributed in various forms:

• Cash Dividends: It is the most common form of dividend. In this shareholders receive a cash payment for each share they own.
• Stock Dividends: Sometimes, instead of cash, companies may distribute additional shares to existing shareholders. This is known as a Stock Dividend or Bonus Shares.
• Property Dividends: In rare cases, companies may distribute assets or property instead of cash or stock. This is known as Property Dividend.

Dividends are usually declared by a company’s board of directors and approved by its shareholders. However, the amount and frequency of dividends can vary widely among companies and are influenced by factors such as the company’s financial performance, its growth prospects, and its dividend policy.

What is Capital Gain?

Capital Gain is the profit realized from the sale of an asset, such as stocks, bonds, real estate, or other investments, at a price higher than its purchase price. It is calculated as the difference between the sale price (also known as the sale proceeds) and the original purchase price of the asset. Capital Gain plays a significant role for investors while making investment decisions. It represents the profitability of an investment and contribute to the overall growth of an investment portfolio.

Key features of Capital Gain include:

• Realization through Sale: Capital Gains are realized only when the asset is sold or disposed of. Until then, any increase in the value of the asset is considered as unrealized gain.
• Profit from Asset Appreciation: Capital Gains represent the profit earned from the appreciation in the value of an asset over time. It can be due to market demand, improvements in the asset’s underlying value, or changes in market conditions.
• Taxation: Capital Gains are typically subject to taxation when the asset is sold. Taxation of capital gains varies based on factors such as the holding period of the asset and the tax laws. Generally, long-term capital gains are taxed at lower rates compared to short-term capital gains.
• Reinvestment: Investors may choose to reinvest their capital gains into other investments. This can be done to defer taxes or to continue building their investment portfolio.

Difference between Dividend and Capital Gain

Basis	Dividend	Capital Gain
Meaning	Dividend is a portion of a company’s earnings or profits that is distributed to its shareholders.	Capital Gains are the profits realized from the sale of investments such as stocks, bonds, or real estate.
Source	Dividends are generated from the company’s earnings.	Capital Gains arise when there is appreciation in the value of an investment.
Necessity	Dividends depend on the decision made by senior management.	Capital Gains depend on the macroeconomic factor.
Nature	Dividend is considered as a regular income.	Capital Gain is considered as a form of investment income.
Preferred By	Dividends are preferred by income-oriented investors seeking regular income.	Capital Gains are preferred by growth-oriented investors looking for appreciation in their investment value.
Taxation	A lower amount of tax is charged on dividends.	High amount of tax is charged on capital gains.
Payment Timing	Dividends are usually paid out quarterly or annually.	Capital Gain is realised when an asset is sold.
Reinvestment	Dividend earned can be reinvested into more shares of the same company.	Capital Gain earned can be reinvested into other assets, but not get automatically reinvested in the same asset.

Dividend and Capital Gain – FAQs

Are dividends guaranteed?

No, dividends are not guaranteed. They are usually declared by a company’s board of directors and can vary in amount or frequency depending on the company’s financial performance and other factors.

Are capital gains impacted by market volatility?

Yes, capital gains are more susceptible to market fluctuations as they depend on changes in the value of the underlying asset.

How are dividends and capital gains taxed differently?

Dividends are usually taxed at different rates depending on various factors, such as whether they are qualified or non-qualified dividends.
Capital gains are taxed at different rates based on the holding period: short-term capital gains are taxed at ordinary income rates; whereas, long-term capital gains often have lower tax rates.

Which is more stable, dividends or capital gains?

Dividends are generally considered more stable as they are based on a company’s earnings and are less affected by market volatility. Capital gains are more susceptible to market fluctuations as they depend on the changes in asset prices.

Can dividends and capital gains be received from the same investment?

Yes, it’s possible to receive both dividends and capital gains from the same investment.