Tuesday, October 11, 2016

Difference between dividend and capital distribution

When you receive money from the investment of common stock, it can be a dividend or a capital distribution.

What is the difference between dividend, and capital distribution?

We can use a simple example to show the difference.

If you buy the shares of an investment holding company with portfolio worth $100 million dollars, and this company makes $10 million dollars in after tax profit, it will give out part of the money in cash to you.

That is known as a dividend.

It is the after tax profit that you receive.

If the investment holding company sells off a company, and it makes $20 million from the sale, and give out the money to you, that is a capital distribution.

The reason is that the holding company could have kept the money as capital for future purchase.  When it cannot find a good purchase, it will return the money to the shareholders.

This reduces the capital of the holding company, that is why the money you get is a capital distribution.

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