Capital Gains Yield

What is Capital gains yield

Capital gains yield is the stock price appreciation on a stock over a period of time expressed as a percentage. In other words, capital gain yield is the stock price at the end of a period divided by the stock price at the beginning of the period.

The calculation of the capital gain yield is used to express the return on a stock based solely in the appreciation of the stock. This measure does not include any other sources of return like dividends paid. Capital gain yield is like the dividend yield of a stock but instead of calculating the dividend received as a percentage of the stocks price it focus only on the capital gains that the stock has made divided by the price initially paid for the stock. The total stock return is usually calculated by combining, or adding, the dividend yield and the capital gains yields. For stocks that don’t pay any dividend or provide any other kind of cashflow to the investor, the capital gains yield is the total stock return.

How to calculate capital gains yield

As we already mentioned the capital gains yield formula can be calculated with the following formula:

Capital gains yield = (P1 - P0)/P0

Where P1 is the ending price of the stock and P0 is the price of the stock at the beginning.

The capital gains yield formula is calculating the rate of change of the stock price. In other words, calculating the rate of change in the stock price all we need to do is to subtract the ending price of the stock from the original stock price and divide then by the original stock price.

Example:

To illustrate better let’s look at an example of calculating capital gains yield. If you buy a stock at $300 and sell the share for $330. The capital gains yield for this particular stock investment will be (330 - 300) / 300 = 10%.

Why we need to calculate capital gains yield

Capital gains yield is especially useful when we try to estimate return from investments that don’t generate cashflow in a format that simulate cashflow returns. It is important for investors as it shows returns that the investment has made based on the capital appreciation. It is important to mention that it is difficult to get a fair return estimation on Capital Gains Yield only as it is highly dependent on the period we do the calculation for as well as based on the price fluctuation on the stock.