What Is Capital Gains Yield (CGY)?
A capital gains yield is the rise in the price of a security, such as common stock. For common stock holdings, the CGY is the rise in the stock price divided by the original price of the security.
Capital gains yield is a simple formula to calculate as the only components needed are as follows:
- The original price of the security
- The current price of the security
That said, the concept doesn't including any income received from the investment.
- A capital gains yield is the rise in the price of an investment such as a stock or bond, calculated as the rise in the security's price divided by the original price of the security.
- A CGY evaluation does not include dividends; however, depending on the stock, dividends may include a considerable part of the total return in comparison to capital gains.
- The total return on a share of common stock includes CGY and dividend yield.
- An investment cannot generate CGY if the share price falls below the original purchase price.
- Capital gains yield is calculated the same way for a bond as it is for a stock: the increase in the price of the bond divided by the original price of the bond.
Understanding Capital Gains Yield (CGY)
Investors must evaluate the total return yield and CGY of an investment. A CGY evaluation does not include dividends; however, depending on the stock, dividends may include a considerable part of the total return in comparison to capital gains.
The total return on a share of common stock includes CGY and dividend yield.
CGY equals the total return if the investment generates no cash flow. It is the amount of money a stock price is forecast to appreciate or depreciate, and it is the percentage change in the market price of a security over time. However, if a stock decreases in value, it is a capital loss.
Capital Gains Yield
How to Calculate Capital Gains Yield
Capital Gains Yield=P0P1−P0where:P0=original purchase price of the securityP1=current market price of the security
For example, Peter buys a share of company ABC for $200 and then sells the share for $220. The CGY for the share in company ABC equals (220-200) / 200 = 10%.
The CGY formula employs the rate of change formula. CGY can be positive, negative, or a capital loss. However, an investment that has a negative CGY may generate profits for an investor. The higher the share price at a specific period, the greater the capital gains indicating higher stock performance.
In addition, the calculation of CGY is related to the Gordon growth model. For constant growth stocks, the CGY is g, the constant growth rate.
Examples of Capital Gains Yield
Tesla CGY 2020
On December 31, 2019, Tesla stock closed at a price of $83.67. On December 31, 2020, they closed at $705.67.
Thus, Tesla's CGY in 2020 was a whopping 743% ($705.67 - $83.67 = $622 / $83.67).
Nike CGY 2020
On December 31, 2019, Nike stock closed at a price of $101.31. On December 31, 2020, they closed at $141.47.
Therefore, Nike's CGY in 2020 was 46% ($141.47 - $101.31 = $46.16 / $101.31).
Netflix CGY 2020
On December 31, 2019, Netflix stock closed at a price of $323.57. On December 31, 2020, they closed at $540.73.
Thus, Netflix's CGY in 2020 was 67% ($540.73 - $323.57 = $217.16 / $323.57).
CGY is unpredictable and may occur monthly, quarterly, or annually. This format differs from dividends that are set by the company and paid out to shareholders at a predefined period.
An investment cannot generate CGY if the share price falls below the original purchase price. Some stocks pay high dividends and may produce lower capital gains. This occurs because every dollar paid out as a dividend is a dollar the company cannot reinvest into the company.
Other stocks pay lower dividends but may produce higher capital gains. These are growth stocks because profits flow back into the company for growth instead of the company distributing them to shareholders while other stocks pay poor dividends and produce low or no capital gains.
Many investors calculate a security's CGY because the formula shows how much the price fluctuates. This helps an investor to decide which securities are a good investment.
Capital gains may result in paying capital gains taxes. However, investors can offset the taxes by losses or carry it over into the following year.
The Bottom Line
Capital gains yield is an important metric that all investors need to know how to calculate. Unless you're able to figure out how much a given investment has appreciated, there's no way to tell if has been successful or not.
That said, the limitations of capital gains yield should always be kept in mind. Specifically, capital gains yield doesn't factor in the income received from dividends or interest, so it should not be used as a blind substitute for the total return calculation.
Capital Gains Yield FAQs
How Do You Calculate the Capital Gains Yield for a Bond?
Capital gains yield is calculated the same way for a bond as it is for a stock: the increase in the price of the bond divided by the original price of the bond. For instance, if a bond is purchased for $100 (or par) and later rises to $120, the capital gains yield on the bond is 20%.
What Is the Difference Between Capital Gains Yield and Current Yield for a Bond?
Capital gains yield measures a given security's rate of appreciation. On the other hand, the current yield is a measure of income.
For a bond, the current yield is an investor's annual interest income dividend by the current price of the bond.
What Is the Difference Between Capital Gains Yield and Holding Period Return?
Capital gains yield does not include income earned on the investment (interest or dividends). On the other hand, holding period return represents the total return earned on an investment (income plus appreciation) during the time it has been held.