Loading the player...

What is 'Capital Gains Yield'?

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.

Calculated as:

Capital Gains Yield

where

P0 = Original purchase price of the security

P1 = Current market price of the security

BREAKING DOWN 'Capital Gains Yield'

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%.

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.

Formula Calculation

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.

Analysis

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.

A security 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.

RELATED TERMS
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  2. Total Return

    Total return is a performance measure that reflects the actual ...
  3. Forward Dividend Yield

    A forward dividend yield is an estimation of a year's dividend ...
  4. Capital Appreciation

    Capital appreciation is a rise in the value of any asset, such ...
  5. Gordon Growth Model

    The Gordon Growth Model is used to determine the intrinsic value ...
  6. Formula Investing

    Formula investing is a method of investing that rigidly follows ...
Related Articles
  1. Tech

    The 3 Best Buy-and-Hold Canadian Stocks

    Learn how the market is misreading Canadian stocks and how long-term buy-and-hold investors can stand to benefit from the misrepresentation.
  2. Investing

    Why Dividends Matter To Investors

    There is much evidence as to why dividends matter for investors, profitability in the form of a dividend check can help investors sleep easily. Learn more.
  3. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  4. Investing

    Dividend Yield For The Downturn

    High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
  5. Investing

    Put Dividends to Work in Your Portfolio

    Find out how a company can put its profits directly into your hands.
  6. Retirement

    How Reinvesting Dividends Pays in the Long Run

    Dividend reinvestment is one of the easiest ways to grow wealth and can increase your investment income over time.
  7. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  8. Investing

    Digging Into The Dividend Discount Model

    The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions.
  9. Investing

    The Top 5 Dividend Paying Software Stocks for 2016 (MSFT, INFY)

    Find out which five dividend-paying stocks in the software sector can bring the best yields and growth potential to your portfolio.
RELATED FAQS
  1. Is there a difference between capital gains and dividend income?

    Selling something for a profit leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ... Read Answer >>
  2. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
Trading Center