Difference between Dividends and Capital Gains

Dividends

A dividend is defined as a periodical interest payment made to an investor for holding the stocks of a company. A dividend acts as an incentive to the investor as they get a portion from the earnings of the company. These dividends get decided by the board of directors for any company and are approved by the management and shareholders. The dividends get paid to the investors at a fixed interval (be it monthly, quarterly or yearly) with a fixed payout rate. It is also a tool to attract investors. A company pays the dividend in the form of cash or stocks.

The dividend has a definite impact on the share price because it is an outflow from the company’s books. Suppose the stock of an organisation is trading at Rs. 500, it declares its dividend as Rs.20 on that same day. When the news breaks in the stock market, it may lead to either an uptick or a downturn in the trading price.

The decision to pay the dividend may or may not be influenced by the performance of an organisation. If the company is undergoing a financial crunch, it may decide to not announce a dividend to its investors. Alternatively, if a company is doing well, then also it may decide to not pay any dividends.

Capital Gains

When an investor sells their investment for an amount greater than its original purchase value, then the difference between the two is known as a capital gain. A capital gain can be both on a short-term (one year or less) or a long-term (more than one year) basis.

Capital gain is a profit that is earned from the capital assets. If there is an increase in the value of the asset, it will count as a profit for the investor. But the profit will not be realised until the asset is sold by the investor.

Any capital gain is liable for taxation. The taxation policy is different depending on whether the investment was for the short term or long term. Suppose an investor had invested Rs. 100000 in the year 2017 in the stock of LHL Limited and purchased 100 stocks for Rs. 1000 each. Now they decided to sell those stocks after one year, and at that time, the stock was trading at Rs. 2000 each. Since the purchase price was Rs. 1000 per stock, the profit from that transaction will be:

= Rs. 200000 – Rs. 100000 = Rs. 100000

So, the total capital gain will come up to Rs. 100000 before taxes. It is important to note that the actual value of capital gains will increase with time, but these gains are also subject to market conditions.

Difference between Dividends and Capital Gains

Both dividends and capital gains help the investor get a positive return on the money they have put into the stocks of a company. It will help to keep the investor motivated enough to stay in the game. However, there are some major areas of difference between dividends and capital gains, and we need to discuss them in the table below:

Dividends

Capital Gains

Definition

The dividend is defined as the profit percentage given by an organisation to its investor.

Capital gain is defined as the profit made by an investor after selling their stocks in an organisation.

Timing

The dividend is paid on a periodical basis subject to the company policies.

The capital gain takes place only when a stockholder liquidates their investment.

Dependence

The dividend depends on the decision of a company’s senior management, and it gets decided by voting.

The capital gain depends on the prevailing market situation.

Taxation

The taxation for dividends is comparatively lower when compared to capital gains.

The taxation for capital gains is comparatively higher when compared to dividends.

Quantum of Investment

The quantum of investment is generally lower for dividends when compared to capital gains.

The quantum of investment is generally higher for capital gains when compared to dividends.

Control

The investor cannot control the timing, frequency and value of the dividend as it is decided by the company management.

The investor can control the timing, frequency and value of the capital gain as they can sell their assets when the economic conditions are favourable.

Conclusion

It is important to understand that both dividends and capital gains are tools that can help investors get a promising return on their investment. They can use these financial means to increase their wealth in the long run. Although there are many areas of difference between dividends and capital gain, customers are attracted to the profitability that both these instruments can provide.

Frequently Asked Questions

What are the various types of dividends?

Some of the main types of dividends that a company can pay to its shareholders are mentioned below:

  • Cash dividend
  • Share repurchase
  • Bonus share
  • Property dividend
  • Liquidating dividend
  • Scrip dividend

What are some of the advantages and disadvantages of paying dividends?

Some of the main advantages of dividends are as follows:

  • Investors prefer it because of the stability it offers
  • Regular payments
  • Investors can attain monetary benefits without having to sell their shares
  • It is a positive signal indicating that the company has a strong financial standing and the future also looks promising

Some of the main disadvantages of dividends are as follows:

  • It can result in decreased retained earnings
  • It may end up in limiting the company’s growth prospects
  • The logistics for allocation and disbursal of dividends is a challenging task for which the company needs employees

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