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Capital gains yield for investors.
Investors are always interested in getting the best returns for their investments. For stock investments in various companies, the dividend declared is not the most accurate way to determine the total returns on investment. Many companies do not pay out all their net income to the shareholders as dividends since they reinvest some of the income to grow faster. The growth of the company usually increases the stock price. Hence, another parameter, the Capital gains yield, abbreviated as CGY, is also used by investors to measure their returns.
What is Capital Gains Yield?
The Capital gains yield measures the increase in the value of a particular security, such as shares, over a period of time.
The increase in the security value is compared to its original value. The CGY will be positive only if the share or other security value increases over time. The CGY is an essential parameter for investors interested in growth stocks that have not declared significant dividends for many years. Investors should know that capital gains are usually taxable in most countries, though other losses can offset the taxes.
Capital Gains Yield Formula
The Capital Gains Yield Formula represents an equation calculating the increase in the price of an investment divided by its original acquisition cost.
Capital Gains Yield (CGY) Formula
Where:
- = Initial price of the asset
- = Final price of the asset
Example 1: Stock Investment
Initial price () = $50
Final price () = $65
Example 2: Real Estate Investment
Initial price () = $200,000
Final price () = $250,000
Example 3: Bond Investment
Initial price () = $1,000
Final price () = $1,050
The formula for expected capital gains yield is :
CGY = (P1-P0)/P0,
WP0 is the initial price of the security or stock, while P1 is the price of the stock/security at the end of the period being considered; the CGY formula calculates the rate of return. The formula for CGY does not consider any dividends paid on the stock investment, which are calculated separately from 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 dividends, the total stock return equals CGY.
How to calculate capital gains yield on the stock using Excel:
Expected capital gains yield calculator
Capital Gains Yield Formula Explanation
Investors should consider both the CGY and the total returns from their investment. In some cases, the dividends may form a large part of investors’ returns, and CGY does not include the dividend. The share prices for a company may either increase or decrease over some time or remain the same. So, the CGY may harm a company, resulting in a capital loss for the investor. However, despite having a negative CGY, the investor may profit if the dividend yield for the business is substantial.
Capital Gains Yield Analysis
The CGY of a company is unpredictable and varies depending on the company’s performance and other macroeconomic factors. It is usually calculated at different periods, like annually, monthly or quarterly. It differs from the company’s dividends, usually paid to the shareholders on specified dates. Companies 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 to help it grow faster. Some companies do not pay dividends and have no or negative capital gain.
Investors can use the CGY to learn about share price fluctuations and decide whether to invest in a particular share.
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