Capital Gains Yield: Definition, Calculation, And Examples
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Summary:
Capital gains yield (CGY) is a measure of the rate of return on an investment over a period of time, expressed as a percentage. It is calculated by dividing the change in the price of an investment by the original price of the investment. CGY does not include dividends or other forms of income, and it can be positive or negative.
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 include 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.
How to calculate capital gains yield
Calculated as:
where:
- P0 = original purchase price of the security
- P1 = 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).
The bottom line
Capital gains yield (CGY) is a valuable metric for investors to understand as it measures the rate of return on an investment over a period of time. By calculating CGY, investors can assess the performance of their investments and make informed decisions about their portfolios.
Frequently asked questions
What factors does capital gains yield (CGY) calculation consider?
The CGY calculation considers the original price of the security and the current market price of the security.
Is CGY affected by dividends?
No, CGY does not include dividends. However, dividends may constitute a significant part of the total return, depending on the stock.
How is CGY calculated for bonds?
CGY for bonds is calculated similarly to stocks: it’s the increase in the bond’s price divided by the original price of the bond.
Can an investment generate CGY if the share price falls?
No, an investment cannot generate CGY if the share price falls below the original purchase price.
What does a negative CGY indicate?
A negative CGY may indicate a capital loss. However, even with a negative CGY, an investment could generate profits for an investor under certain conditions.
Key takeaways
- Capital gains yield (CGY) measures the rate of return on an investment.
- CGY calculation excludes dividends and other forms of income.
- Understanding the interplay between CGY and total return is crucial for investors.
- Investors must consider CGY and dividend yield for a comprehensive assessment.
- An investment cannot generate CGY if the share price falls below the original purchase price.
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