What is Capital Gains Yield?
Capital Gains Yield is the increase in the value of an asset or portfolio because of the rise in the price of an asset (not the dividend paid because the owner has held the asset), combined with the dividend yield, it gives the total yield i.e, profit because of holding an asset.
Capital Gains Yield Formula
We use this formula when we want to know how much return we will get only based on the appreciation or depreciation of stock.
Here, P0 = price of the stock when we invested in it, and P1 = price of the stock after the first period.
We look at the beginning stock price and the stock price at the ending of the first period. And then, we will compare these two stock prices and find out the differences. Then we will find out the percentage of the differences based on the beginning stock price.
This formula can also be crafted as –
Capital Gains Yield Formula = (P1 / P0) – 1
Let’s take a practical example to understand this concept in detail –
Ishita wants to see how much she has earned on a particular stock only based on capital appreciation/depreciation. She has seen that when she has bought the stock, the price was $105. Now, after 2 years, the price of the stock has appreciated to $120 per share. What is the Capital Yield on that particular stock?
All we need to do is to put in the data into the formula for capital gains yield calculation.
- Capital Gains formula = (P1 – P0) / P0
- Or, Capital Gains = ($120 – $105) / $105
- Or, Capital Gains = $15 / $105 = 1/7 = 14.29%.
That means, by using this formula, we understand that Ishita got 14.29% capital gains after 2 years of investment.
If the company offers a dividend, we can also calculate the dividend yieldCalculate The Dividend YieldDividend Yield is calculated by dividing annual dividend per share by current market price of the share. It is one of the most important metrics in deciding whether an investment into the share will result in the expected returns. and find out the total return on investments.
Use of Capital Gains Yield
For every investor, the capital gain is an important measure.
Many companies don’t pay dividends. In that case, the investors can only get the capital gain yield as the return on investments.
Since this yield can be positive as well as negative, it affects the total returns the investors get.
For example, if Mr. A gets a total return of 25% on the stock, it can be the result of a negative capital yield of – 5% and a dividend yieldDividend YieldDividend yield ratio is the ratio of a company's current dividend to its current share price. It represents the potential return on investment for a given stock. of 30%.
So, here’s what we consider while calculating the total returns – Capital and Dividend yield
We already know the calculation.
To calculate the dividend yield, we need to use the following formula –
Dividend Yield = Annual Dividend / Price
Capital Gains Yield Calculator
You can use the following Calculator
|Capital Gains Yield Formula=||
Calculate Capital Gains Yield in Excel
Let us now do the same example above in Excel.
It is very simple. All you need to do is to put in the data into the formula.
Capital Gains Yield Formula Video
This article has been a guide to Capital Gains Yield and its meaning. Here we discuss the formula to calculate Capital Gains Yield along with practical examples, its uses, and interpretations. You may also have a look at these articles below to learn more about Financial Analysis –