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 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 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 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 other losses can offset the taxes.
Capital Gains Yield Formula
Capital Gains Yield Formula represents the equation based on calculation as the increase in the price of an investment, divided by its original acquisition cost.
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 that calculates the rate of return. The formula for can CGY does not consider any dividends 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.
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 a period of time or remain the same. So the CGY may be negative for 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 companies performance and other macroeconomic factors. It is usually calculated at different periods, like annually, monthly or quarterly. It is different from the company’s dividends, which are 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 capital gain or negative capital gain.
Investors can use the CGY to get information about the share price fluctuation and decide if they wish to invest in the share.