Are Dividends or Capital Gains Better?


You may have noticed that you’ve gotten both capital gains and dividends from investing. Or maybe you’re trying to decide if you should focus on dividends vs capital gains as a primary objective in selecting an investment.  

Are dividends or capital gains better? Dividends are better for investors seeking income as a primary objective while capital gains are better for investors looking to build wealth as a primary objective.

When it comes to investing for dividends vs capital gains, however, sometimes you can have both as explained later in this post. First, however, let’s clarify a few important points about dividend vs capital gain investing. I’ve also included one of my YouTube videos on dividends so be sure to check that out. 

The Difference Between Capital Gains and Dividends

While making money is making money, there is a big difference between capital gains and dividends. Capital gains come from making a profit when you buy and sell an investment while dividends come from a company paying its earnings out to shareholders.

Investing Goals Determine If Dividends or Capital Gains Are Better

Even though we all like hard and fast rules, there is really no one answer to whether dividends or capital gains are better for an investor. Both objectives are good since they can increase wealth, but there are some advantages of one over the other at certain times.

A lot of the answer about whether dividend or capital gains are better comes down to timing and your age.

First and foremost, you’ll ideally have an overall wealth plan that will guide you to whether dividends or capital gains are better for you at any given time in your life. Otherwise, it’s easy to get lost in the allure of making a certain dividend or capital gain from an investment without investing based on your overall wealth objectives. 

A wealth plan with investing goals, however, is the starting point for determining what type of investment you’ll need to get the results you want, whether that’s income from dividends or capital gains. 

Having made it clear it’s important to begin with an overall wealth plan before buying any investment, whether for dividends or capital gains, let’s delve into these two core investment objectives so you can decide which is better for you.


Check out my Ultimate RISE Wealth Plan. You can get it here now.


Dividends Are for Living Off Investments or Retirement Income

Dividends are usually better when living off investments. Living off investments is associated with retirement, although many in the younger generations are choosing to retire early and live off investments.  

As a general rule, when you have enough money to live off investments, you’re doing so; this means that capital gains usually take a back burner to dividends since the primary goal of capital gains is building wealth while the primary goal of dividends is income. At this stage, dividend or income investing is done to support investor’s lifestyles, AKA, pay the bills.  

My related post When to Switch from Growth to Income explains this more.  My post Is Dividend Investing Worth It? has an excellent dividend chart.

Let’s use the example of a 55 year old investor named Jim who has decided to retire. Since Jim will not be getting Social Security for a number of years, he will either have to establish some form of alternative retirement income from one of the many options, or he will need enough investment capital to generate enough dividend income to live if he chooses to focus on stock investing for income.

Otherwise, Jim would need to start making retirement withdrawals in his 50’s, and he prefers to wait or avoid making retirement withdrawals altogether. 

Jim doesn’t spend much, and he lives in an area with very low costs. He had already paid for his home. He thinks he may need some extra retirement income above dividend income, so Jim decides to start consulting business in retirement to generate $2,000 a month. His cost of living is about $4,500 a month.

Jim has worked, saved, and invested well over the years. This has allowed him to accumulate a million dollars in his investment account. Given this, Jim thinks the investment income he can generate off his investment capital of one million plus his part time consulting income will be enough to pay for his retirement lifestyle. Let’s see if it is. 

Jim’s Dividend Income on $1,000,000

Let’s say Jim buys one million dollars worth of dividend stocks that pay dividends of 4% on average, an optimistic assumption. He will collect $40,000 a year, or $3,333 a month from his dividend stocks. When added to Jim’s consulting income steam, Jim can come close to covering his monthly expenses, depending on taxes. 

In this example, you can see that dividends may be a better choice for Jim since he is living off investments and his investments already are enough to continue to do so. In other words, he doesn’t need to invest primarily for capital gains. 

This is assuming Jim is happy with the amount in this investment account, and he feels it will provide funds for life. My related post How to Get More Income from Your Investments has 43 income strategies besides dividends. My post How Much Money Do I Need to Invest to Make $10000 a Month compares income investing strategies.

For purposes of illustration, I excluded potential retirement account issues in showing how and why dividend investing may be better for Jim. It’s worth noting, however, that many investors in the US have their accumulated wealth tied up in retirement accounts. Jim may have to do some creative financing or work with a CPA or financial planner to avoid penalties related to his retirement account to be able to invest in a diversified dividend portfolio vs the limited choices in many retirement accounts.

Dividends Are More Certain Than Capital Gains

Another important point to consider for investors who think that dividends are better than capital gains is that dividends are less volatile than capital gains in two ways. 

First, stocks that pay dividends tend to fluctuate in price less than stocks that don’t pay dividends. This is because dividend paying stocks are usually older and have long established earnings. 

Also, when a bear stock market occurs. investors often continue to hold dividend stocks for the income they get while they will sell stocks that were owned for capital gains. 

Second, going back to Jim, when Jim buys a stock he doesn’t know if the stock will go up or down. In other words, he may not have a capital gain over his investing time frame.

This stock market risk can be problematic for older investors, for sure. Dividends are less likely to get cut, however, than stocks are to fluctuate in price. In other words, while some dividends get cut, it’s rare, making dividends more predictable than capital gains. 

Are Dividends Stocks Worth It Though? 

The major downside to dividend stocks is that stocks go through occasional bear markets that are hard to stomach, especially for retirees. There’s just no way for long term buy and hold stock market investors to avoid this reality. This is why most stock investors, including those who invest for dividends, use an asset allocation with at least some defensive investments in their portfolio to offset stock bear markets. 

Having addressed this major drawback to investing in stocks, let’s look at an investor that may be better off investing for capital gains instead of investing for dividends next. 

FactorDividendsCapital Gains
ObjectiveIncomeBuild Wealth
PredictabilityHigh Medium to Low
Time FrameCan Receive ImmediatelyUsually Takes Months or Years
Determining FactorPaid by Company to ShareholdersMade From Increases over Cost
ReceivedUsually Quarterly"Realized" When Asset Sold
Investor ControlNone - Board DeterminesDetermined by Investor Purchases and Sales
This table shows the main differences between dividends and capital gains for traditional investing methods.

Capital Gains Are for Wealth Building

Another investor, Jan, is 50. She makes $250,000 a year from her employment. This covers her expenses and allows her to save some money every month.

Jan has $ 500,000 in a stock and bond portfolio. From her personal wealth plan, Jan knows she has not yet reached the level of invested net worth that she wants so she can live off investments comfortably in retirement.

Also, Jan makes more than enough income for her to pay all of her bills, and then some. For this reason, capital gains are better than dividends for Jan’s primary investment goal since Jan wants to focus on building wealth so she can have a high enough net worth to retire. (Note that I try to be lingo free here at Retire Certain, but in financial lingo, this investment goal is commonly and logically referred to as an “objective”.)

Read How Much Money Do You Need to Live Off Investments where I explain this more.

Can You Have Both Dividends and Capital Gains?

The answer to this question is an unequivocal yes, you can have both dividends and capital gains.

Having explained when dividends are better than capital gains and vice versa based on traditional investing rules, here’s an important point that often gets muted with traditional, long term asset allocation investing: Income generating investments, such as dividend stocks, but not exclusively dividend stocks,  can also build wealth through capital gains.

Such wealth building is commonly done in two primary ways, long term investing and tactical investing.

Long Term Investing

Over time most quality assets increase in value. This means that investors can build wealth passively while also receiving dividend income from investments. Just keep in mind that the assets chosen for dividend investing are usually somewhat different from the investments bought for capital gains. 

Growth investments, or stocks, are bought specifically for capital gains while more established companies are bought for dividends as explained in my related post How to Build Wealth. This is why most investors aim for an initial primary goal of dividend income or capital gains when investing in stocks. 

Cycle Investing for Dividend Stocks 

All investments go through cycles that are usually related to the overall economy.

After low cycles, quality stocks that are bought below historical valuations usually return to their previously higher valuations.

I feel I must be careful to explain that this is not always the case, but it usually is. Exceptions occur when there are major “disruptors”, such as the internet, major political changes, or complete mismanagement, such as Enron shenanigans or seriously overextended lenders before the financial crisis.

Most quality stock prices, however, naturally move over or under a historical average, or mean, and they revert to this mean through cycles. This is known as “mean reversion” in financial lingo. My post How to Know if The Stock Market Will Go Up or Down explains this more.

When investments are bought way under the historical mean, investors frequently experience capital gains as the price of stocks rise up and over the mean after stocks dropped. This method of buying quality assets at low valuations can create capital gains faster than when investors ignore valuations.

Here is my point in relation to whether dividend income is better than capital gains: This mean reversion happens with dividend stocks after bear markets, and when it happens, investors have both dividends and capital gains.

And having both capital gains and dividends is sort of like having your cake and eating it, too. This is the goal of tactical vs strategic investing

In my video below, I explain more about dividends and capital gains. 



Taxes on Dividends Vs Capital Gains

The different tax treatments for dividends vs capital gains adds another layer to your investment evaluation since taxes are treated differently for dividends vs capital gains.

How Are Capital Gains Taxed?

The first thing to address is how capital gains are taxed and you’ll see why.

Capital gains that occur in over a year are treated differently from capital gains that occur in less than a year, so here are the basics. Capital gains that occur in over a year are considered long term capital gains while capital gains in under a year are short term capital gains. Long term capital gains and short term capital gains get netted on your tax return. Then, the end result is taxed accordingly. 

In general, short term capital gains are taxed at the same rate as earned income, which is the highest tax rate for most investors. On the other hand, long term capital gains typically get a lower tax rate. 

How Are Dividends Taxed?

Most stock dividends are taxed at a lower rate than earned income for most investors. (Yes, I have two “most’s” in that sentence, because dividend rates vary based on income and other factors and there is no one size fits all answer.) 

Best Free Resource for Tax Rules on Dividends and Capital Gains 

Not only do tax rules change often, but they also vary greatly from one investor to the next based on income, dependents, and other factors.

For this reason, you’ll want to check on the IRS website for the latest information at no cost. You can also find useful information by googling but make sure the answers you find are current and from a knowledgeable source.

If you use a CPA, ask your CPA about taxes for dividends vs capital gains. I do, however, encourage all investors to understand these basics for taxes on dividends vs capital gains when selecting investments. 

At the end of the day, the amount earned from both dividends and capital gains minus taxes and fees is what you get to keep. This means that taxes are an important factor when evaluating investments

So, Are Dividends Better Than Capital Gains for You?

Making the choice to focus on dividends vs capital gains is a major factor in investing. When you start with an overall wealth plan, you’ll have more clarity about which is better for you based on your own investing goals.

As you can see, there are times when dividends are better than capital gains for investors, and there are times when capital gains are better than dividends for investors. There is no one answer for everyone, as is usually the case with investing your money.


The best place to start is with my Ultimate Wealth Plan. You can get it here now.



The information on this website is for education only and is not to be construed as personal financial advice.