Dividends vs. Long-Term Capital Gains
Original post by Geri Terzo of Demand Media
Dividends are distributed on a monthly, quarterly, semi-annual or annual basis, depending on the company. Investors can reinvest dividend earnings back into the stock while waiting for the investment to produce long-term capital gains; alternately, the investor can pocket the dividend income for a short-term profit. Long-term capital gains are earned over a period of more than one year. Dividends and long-term capital gains are subject to different tax laws.
Companies pay investors cash or stock dividends when the business has surplus profits. A company's management team and board of directors must agree on making the payments. This means that dividends are not guaranteed, although they be very consistent. In June 2011, energy company National Fuel announced its latest dividend distribution, which represented more than one century of consistent dividend payments, according to Reuters. The company has raised its dividend amount each year for more than four decades.
Long-term capital gains in the stock market are earned on stocks held for more than a year. Investors who are willing to hold onto equity securities rather than cashing the investments in for a quick profit are often saving with a particular goal in mind. Investors saving for retirement are more likely to achieve greater rewards by focusing on long-term gains rather than trying to navigate unpredictable market movements over the short term, according to CNN Money.
Dividends and long-term capital gains are both subject to tax but each type of income is treated differently. The maximum tax rate for long-term capital gains earned in the stock market is 15 percent, as of 2011. Ordinary dividends, which are the usual type of equity distributions, are treated as short-term gains and taxed as ordinary income. In some cases, dividend income may be treated as a capital gain, but the issuing company and investor must meet a series of requirements.
Only one-fifth of publicly traded companies in the U.S. pay dividends to investors, reports Florida Today. Most of the dividends paid do not fall under the more favorable capital gains tax bracket. Long-term capital gains can be controversial. In 2011, when U.S. Congress was negotiating a budget-cutting agreement, long-term capital gains taxes were debated. Some believe the lower tax rate applied to wealthy investors for long-term capital gains is unfair and should be replaced with a tiered tax structure that applies to income earned in the workplace.
- Reuters; National Fuel Announces 109 Years Of Uninterrupted Dividend Payments And 41 Consecutive Consecutive Years of Increases; June 2011
- SmartMoney; Estimate Capital Gains Tax; June 2011
- Internal Revenue Service: Topic 404 – Dividends
- "The Washington Post"; Capital Gains Tax Rates Benefitting Wealthy Feed Growing Gap Between Rich and Poor; Steven Mufson; September 2011
- "Florida Today"; Dividend Paying Stocks Rife With Risk; Dan Moisand; September 2011
- CNN Money; Retirement Investing: Think Long Term; Walter Updegrave; March 2011
About the Author
Geri Terzo is a business writer with over 15 years experience reporting on Wall Street. Her coverage ranges from institutional investing, including hedge funds and investment banking, to family topics and her career experience includes work for Fox Business, CNBC and "IDD Magazine." Terzo is a graduate of Campbell University, where she earned a B.A. in mass communication.
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