Capital gains yield for investors
Investors are always interested in getting the best returns for their investment. For their stock investments in the various companies the dividend declared is not the most accurate way to determine the total returns on their investment. Many companies do not payout all their net income to the shareholders as dividend since they reinvest some of the income to help the company grow faster. The growth of the company usually results in an increase in the stock price. Hence another parameter the Capital gains yield, abbreviated as CGY is also used by investors to measure their returns.
The Capital gains yield measures the increase in the value of a particular security like shares over a period of time.
The increase in the security value is compared to the original value of the security. The CGY will be positive only if the value of the share or other security will increase over a period of time. The CGY is an important parameter for an investor who is interested in investing in growth stocks, which do not declare large dividends or have not declared any dividend for many years. Investors should be aware that capital gains are usually taxable in most countries, though the taxes can be offset by other losses.
The formula for expected capital gains yield is :
CGY = (P1-P0)/P0,
where P0 is the initial price of the security or stock, while P1 is the price of the stock/security at the end of the period which is being considered. The CGY formula is a formula which calculates the rate of return. The formula for can CGY does not consider any dividends which may be paid on the stock investment, which are calculated separately with the dividend yield formula. The CGY is combined with the dividend yield to determine the total return for the stock. If a company does not pay any dividend the total stock return is equal to CGY
Expected capital gains yield calculator
Investors should consider both the CGY and the total returns from their investment. In some cases the dividends may form a large part of the returns for investment, and CGY does not include the dividend. The share prices for a company may either increase or decrease over a period of time or remain the same. So it is possible that the CGY is negative for a company, resulting in a capital loss for the investor. However, despite having a negative CGY, the investor may make a profit, if the dividend yield for the business is substantial.
The CGY of a company is unpredictable and varies depending on the companies performance and other macroeconomic factors.It is usually calculated at different periods, like annually, monthly or quarterly. It is different from the dividends of the company which are usually paid to the shareholders on specified dates. Companies which are paying high dividends usually have lower capital gains since the amount paid out, cannot be reinvested in the company. Some companies declare low dividends yet have a higher CGY, since the profit is mainly reinvested in the company to help it grow faster. There are also companies which do not pay dividends and have no capital gain or negative capital gain.
Investors can use the CGY to get information about the price fluctuation of the share and decide if they wish to invest in the share.