A dividend that is paid out of paid-in capital rather than from current net profits or retained earnings. Unlike, stock dividends, capital dividends are distributions. In general, capital dividends are tax-exempt with respect to a stockholder at the time of payment. However, they have the effect of adjusting the basis of the stock downward, resulting in a larger capital gain or a smaller capital loss at the time the stock is sold.

The capital dividend is also known as return of capital.