For an investor, the sole purpose of investment is to realize financial gains. These gains can come in various forms, but are usually categorized as dividends or capital gains. Both of these help investors earn excess money, but their relationship may differ depending on the type of investment made.
For starters, dividends are earnings which are gained by an individual after he or she purchases a certain amount in stocks of a particular company. That money is then invested in the company and from the resulting profits, the owners of the business pay out their investors. Capital gains also work in a similar way but they can be obtained from various forms of investment rather than simply stocks. These could include investments made in land, property, buildings etc.
Paying out dividends to an investor is subject to a company’s own preference or policy. Sometimes a company may not earn profit, and therefore, is not entitled to pay its shareholders. However, capital gains can be obtained whenever a gain is realized. For instance, an individual can decide to sell off his home or any other real estate investment and get the resulting profit for his personal use.
On the other hand, an investor may hold on to his investment for as long as he chooses to, even though he or she is realizing capital gains. However, dividends work in a different way and may be taken when declared by the company. Nonetheless, the investor can re-invest the money back in the company.
Tax considerations also vary depending on the state you are living in. Capital gains may have higher tax implications for the investor, depending on his or her investment portfolio as compared to dividends, which are solely treated as a form of income received by a shareholder. The tax rate therefore, will be applied on a relatively smaller scale.