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Investing money
Dividends or capital gains? Find out what the difference is and which strategy is better suited to investors.
Investors are faced with the question of which strategy is best: Hold shares and hope for dividends, assuming the company decides to distribute part of its profits to its shareholders, or sell when the share price rises and thus make a profit? There are also tax advantages and disadvantages to consider for both types of investment.
The term dividend comes from the Latin word dividere, which means “to divide” (“dividendus” literally means “that which is to be divided”). With dividends, a company shares a portion of its profits generated during a specific period with shareholders who have invested capital and acquired shares in the company.
Dividends are a sign that the company is operating successfully and generating profits. Those who reinvest their dividend payments in shares also benefit from the compound interest effect. However, you can also have your dividends paid out.
The size of dividend is decided by simple majority at the company’s annual general meeting based on a proposal by the board of directors. However, shareholders may also decide against the payment of a dividend – for example, because investments are pending or the company’s capital needs to be strengthened.
Use our investment calculator to work out how quickly you can reach your desired asset value.
Capital gains arise when the value of a share rises above the purchase price. The profit is therefore derived from the increase in the value of the share. Both strategies – capital gains and dividend payments – are associated with the risk that the share price may not only rise but also fall.
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| Risk | Risk | Payout | Payout | Taxes | Taxes |
|---|---|---|---|---|---|---|---|
| Dividends | Risk | Price loss | Payout | Annual or quarterly | Taxes | Income tax |
| Capital gains | Risk | Price loss | Payout | If sold | Taxes | No income tax (for private individuals) |
While dividends tend to be more passive, with regular payouts depending on the company’s dividend policy, capital gains require a more active approach. You need to keep an eye on share prices, spot the right time to sell and then act. Don’t underestimate how much work this can involve.
Whether dividends or capital gains are weighted more heavily or less heavily in your own portfolio depends on your personal strategy, risk tolerance and investment horizon. Both approaches can also be combined, depending on what suits your particular lifestyle and financial situation.
Swiss private individuals must pay tax on dividends as income. Capital gains, on the other hand, are not usually subject to income tax, provided trading in securities is not classified as commercial activity.
In addition, a withholding tax of 35 percent is levied on dividends. This is deducted before the dividend is distributed and paid to the state. Residents of Switzerland can reclaim the withholding tax on their tax return. However, income tax is levied on the entire dividend, not just on the 65 percent that is actually distributed.
Dividends and capital gains are popular forms of investment. Both have their advantages and disadvantages. Which is suitable for investors depends on very individual factors.
It is therefore always worth weighing up what makes sense – and when – before choosing between dividends and capital gains.
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