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 in selecting investments, leading you to wonder:   

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.

I’ve learned after over 40 years of investing that the best investments have been those that generate both income, such as dividends, and capital gains, not one of the other. I call this eating your cake and having it, too.

The fact is that while dividends and capital gains are definitely not mutually exclusive, having a primary objective does make setting and tracking financial goals, and choosing investments easier

In this post, I’ll cover:

  • The easy way to know if dividends vs capital gains are better for you
  • Examples of two successful dividend vs capital gain focused investors
  • The hardest thing about investing for capital gains (even for the pros!)
  • Whether dividends or capital gains are more reliable
  • Who should invest for dividends & who should invest for capital gains   

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

You probably already know this if you’re here, but just in case, here’s the difference between capital gains and dividends with lightening speed:

Capital gains come from making a profit when you sell an investment for more than you paid for it, while dividends are a form of income that’s generated when a company pays earnings out to shareholders.

How to 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 all investors. Both actions are good since they each put money in your pocket, or rather in your investment account, but there are some advantages of one over the other at certain times.

Ideally you’ll have an overall wealth plan that will clarify whether dividends or capital gains are better suited for you at any given time, thereby driving your investment selections. Otherwise, it’s easy to get lost in the allure of getting a particularly attractive dividend or a potential capital gain from an investment without basing your selection on what is most likely to achieve your overall financial goals. 

A financial plan with investing goals, however, is the starting point for determining your desired result (or “objective” in financial lingo) from investing, whether that’s income from dividends or capital gains. 

Having clarified the importance of an overall plan in determining if dividends or capital gains are better for you, let’s delve into these two core investment objectives so you can decide which objective to focus on at any given time.


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Dividends Are for Living Off Investments or Retirement Income

A primary goal of getting dividends from stocks is usually best for investors no longer getting job income and trying to live off investments. (Living off investments is associated with retirement, although many people now retire early with a plan to live off investments so dividend investing isn’t only for older investors.)  

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 an investor’s lifestyle making income the primary goal at this stage.

Example of Investor Seeking Dividends vs Capital Gains

Let’s use an example to illustrate this point with 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 dividend investing for a major income source.

Otherwise, Jim would need to start making retirement withdrawals (that could dip into capital gains or initial capital) in his 50’s, and he prefers to wait or avoid making retirement withdrawals altogether while, ideally, capturing and leaving capital gains in his account. 

Jim doesn’t spend much, and he lives in an area with very low costs. He has already paid for his home and his cost of living is about $4,500 a month on average.

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 from dividends 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 stocks that pay dividends of 5% on average. He will collect $50,000 a year, or $4,167 a month from his dividend stocks. Jim sees he cannot fully live off dividends, but he feels certain he can generate some other form of income from consulting, part time employment, or both, to more than cover his monthly expenses.

In this example, you can see that dividends may be a better choice for Jim since he wants the investment income to support his lifestyle.

Jim is an advanced investor and he has demonstrated an ability to generate capital gains in various types of markets, so he feels confident he will be able to achieve capital gains on his dividend stocks, as well as collect the income. He will leave the capital gains in his investment account to compound, however, and capital gains are a secondary objective after dividends.  

For purposes of illustration, I assumed Jim’s million dollars is in a regular account to avoid potential retirement account issues in showing how and why dividend investing may be better for Jim. It’s worth noting, however, that many investors have their accumulated wealth tied up in retirement accounts, and this could affect an investor’s ability to make withdrawals for the investment income generated by the dividends. 

Example of Investor Seeking Capital Gains vs Dividends

Jan is 50 and plans to retire around age 63. She makes $250,000 a year from her employment. This covers her expenses and allows her to save at least $5,000 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 amount of retirement savings 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 high enough retirement savings to retire. 

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.

Dividend stocks, but not exclusively dividend stocks, can also provide capital gains and therefore build wealth while also paying out income.

Keep in mind that the stocks chosen primarily for dividend investing are usually different in nature from the stocks bought for capital gains, however. 

Growth stocks tend to reinvest their earnings back into the company vs paying earnings out as dividends. On the other hand, established mature companies are more likely to pay out dividends. 

This is why most investors define an initial primary goal of dividend income or capital gains prior to selecting stocks, but sometimes investors are fortunate to have both. 

Getting capital gains on dividend stocks is commonly accomplished in two primary ways, long term buy and hold investing, and tactical investing.

Long Term Investing

Over long periods of time most quality assets increase in value. 

Cycle Investing for Dividend Stocks 

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

After bear markets, quality stocks can be bought at significantly lower earnings multiples than previously.

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, complete mismanagement, or financial problems at a company.

When quality stocks are bought at low earnings multiples after bear markets, investors frequently experience capital gains as the price of stocks rise back up to higher levels. 

This opportunity happens with most stocks after bear markets, including dividend stocks, even though they typically don’t fall as much as growth stocks in bear markets. When it happens, investors achieve both dividends and capital gains, often througout the subsequent bull market that tends to follow bear markets.

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



Taxes on Dividends Vs Capital Gains

Investors might want to consider taxes when deciding if dividends or capital gains are better for them 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 because it’s a little complicated.

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.

Are Dividends or Capital Gains Better in General?

Let’s forget about a primary objective and financial rules for a moment to address what makes both dividends and capital gains each better in their own way. You can see what resonates with you now that you know what the traditional approach is to selecting between dividends and capital gains. 

Why Dividends Are Better Than Capital Gains

Below are three things that make dividends better than capital gains, in general.  

  1. 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; this adds to the stability of dividend stocks vs stocks owned primarily for capital gains. 
  2. 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 with a dividend stock. While sometimes dividends get cut, it’s rare, making dividends more predictable and stable than capital gains. 
  3. Dividends can be recieved immediately after buying a stock, while capital gains sometimes (but not always!) take longer. 
  4. Albeit small, dividends are steady and ongoing, while capital gains are not. 

Why Capital Gains Are Better Than Dividends

Capital gains have traits that make them inherently better, in general, than dividends, as well.  

  1. There’s more bang for the buck. Dividends are small but capital gains can be huge. 
  2. Capital gains are controlled by the investor selling assets that were bought for less than the sales price. Dividends are controlled by the board of the issuing corporation. 
  3. Nobody ever got rich from a dividend, but they have gotten rich from a nice big capital gain. 
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.

Forget the Rules

Some investors ditch the rules and focus on:

  • Their abilities to succeed at either picking winning stocks (or other assets) in an effort to generate capital gains, OR in evaluating safe but high yielding dividend stocks
  • Whether the stock market is better at any given time for capital gains potential OR slow and steady dividend investing
  • Macro factors, such as prevailing dividend rates and economic activity which affect both dividends and capital gains potential 

Please understand I’m not suggesting you ditch the rules. It’s just that I sort of have ditched them, and I like to write about what is working for me vs what the text books and most other online sourses say. I write what I have found to be true from decades of investing.  

Are Dividends or Capital Gains Better for Me?

After many years of focusing on income generating assets following “our stumble into early retirement”, I began investing following a slightly more advanced investing strategy that has delivered excellent returns with very acceptable risk based on backtested performance over the past 50 years. 

The strategy invests in ETF’s, and it rotates out of ETF’s that are falling and into ETF’s that are rising based on long term cycles. This just makes sense to me, and the past results speak for themselves.

Regarding dividends and capital gains, the topic of this post, while I get some income from the stock dividends (and bond interest), the strategy relies mostly on capital gains for it’s returns, which I find exceptional as shown in my Allocate Smartly Review.     

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 and your current progress to reach them.

As you can see, there are times when dividends are better than capital gains, 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.

There’s only you, your goals, and what you are willing or able to do within the confines of the macro economic factors that affect our investment returns from both dividends and capital gains, but are ultimately outside our control. 


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.