Dividends vs. Capital Gains: Which is Better?

Dividends vs. Capital Gains: Which is Better?

Differences Between Dividends vs. Capital Gains

If you want to build wealth through investments, you can accomplish this through dividends and capital gains. They’re designed to help you make viable investments but with entirely different tax implications. However, before you begin investing, it’s essential to which is better for your portfolio.

What Are Dividends?

Dividends are a portion of earnings from a company whose shares you own. It’s important to note that not all companies offer periodic dividend payments to investors. These are known as dividend stocks. So, if you own a hundred shares with a company that paid out dividends of $2 per share monthly, semi-annually, or annually, that means your dividend payment would be worth $200. Companies that usually pay out dividends are not growth stocks but mostly blue-chip stocks. Great examples are Chevron Corporation and Edison International, that payout 5.06% and 4.76% in dividends, respectively.

It’s important to note that dividend payments are not determined automatically. The company would have to look at many financial factors like their debt, profitability, and earnings. It would be best if you looked out for companies that have been consistent with dividend payouts for at least 20 consecutive years or more. Another impressive way to get dividends is through mutual funds, representing the total earnings of companies in that fund.

What are Capital Gains?

Compared to dividends that the company pays out, capital gains are the profits you make on your investment. You can only get this when you sell your stocks at a higher price. So, if you bought about a hundred shares worth $2,000 and eventually sold them at $5,000, your capital gains would be $3,000, which is the difference between your purchase and sale price. With capital gains, this is a good sign that your investments are performing well and you’re following the market rules.

Buying low and selling high will only lead to positive growth of your portfolio. However, it’s best to keep a strategic mindset if your capital gains are negative when you buy the wrong stocks. It’s entirely up to you to make the right move towards profits.

Taxation Liability

Since dividends are usually low income, your taxation liability is relatively low compared to capital gains. This means dividends provide a more favorable tax option in the long run. For capital gains, taxes usually depend on whether your investment is short-term or long-term. So, if you own stock for less than a year, the tax rate is equivalent to that on your ordinary income. For long-term capital gains, the tax rate kicks in after selling an investment you have owned for more than a year. Most investors will find this second option more favorable.

Investment

To get significant capital gains, you would have to acquire a large investment. This also increases the risk level, especially when compared to dividends. As long as it is a dividend-paying company, you’re eligible for payments on any investment amount.

Maximize Returns and Minimize Risk with Tobin & Collins

Deciding whether you should invest in dividends, capital gains, or both can be a difficult decision to make. Tobin & Collins is always available to take you through each stage of your investment journey to help you maximize returns and minimize risk. Schedule a consultation with us at (201) 487-7744 or by filling out a contact form.

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