When we hear about the returns an investor receives on a stock investment, many of us assume it refers to dividends that the company pays. However, as Bank of Labor’s investment professionals can tell you, your returns can also come in the form of capital gains, which you get when you buy low and sell high.

A metric called the capital gains yield (CGY) is an important tool for anyone who wants to better understand, calculate, and interpret capital gains.

What Is Capital Gains Yield (CGY)?

A capital gain is a profit you make when you sell something for more than you paid for it. The asset can be anything, such as a house, car, stocks, bonds, etc. The higher price usually comes when you purchase something that’s been discounted or that has appreciated in value over a period of time. 

With stocks, you’re likely to enjoy capital gains over the long term because companies will invest in their business for growth. As they do this, they become more valuable, and the share prices go up. The capital gains yield is the percentage gain in the stock price since you first purchased your shares. 

Calculating Capital Gains Yield

The capital gains yield formula is simple enough. 

Richard Hampton, SVP and Senior Trust Officer at Bank of Labor, noted that capital gains is the difference between the two stock prices over time divided by the original stock price.

Says Hampton, “If you want to get a percentage, you can multiply your final result by 100”

Here’s the formula for CGY:

Capital Gains Yield = (Price 1 – Price 0)/Price 0

Price 0 is your original stock (or bond) purchase price. 

Price 1 is the price of the stock (or bond) at the time you sold it or whenever you decide to figure out your CGY.

Let’s assume you buy one share of Company X for $100 and then sell it a year later for $130. The CGY for that share is: (130-100)/100 = 30%. 

Examples of Capital Gains Yield

Here are several real-life examples of capital gains yield.

NVDA CGY 2021

On Jan 4, 2021, Nvidia stock closed at $132.77 per share. On Jan 3, 2022, the stock closed at $272.47 per share. Therefore, the company’s CGY for the year was (272.47-132.77)/132.77 = 105.22%

GOOGL CGY 2021

On Jan 4, 2021, Google stock closed at $1797.83 per share. On Jan 3, 2022, the stock closed at $2740.34 per share. Therefore, the company’s CGY for the year was (2740.34-1797.83)/1797.83 = 52.42%

TSLA CGY 2021

On Jan 4, 2021, Tesla stock closed at $890.02 per share. On Jan 3, 2022, the stock closed at $1026.96 per share. Therefore, the company’s CGY for the year was (1026.96-890.02)/890.02= 15.3%. 

Interpreting Your Investment Returns

It’s challenging to learn a lot about an investment from its capital gains yield alone. While the formula is sometimes used in financial modeling and corporate finance, regular investors should better understand how their investments perform relative to dividends and their total return. 

Dividend Yield

An investment’s dividend yield is calculated by dividing the dividend per share by the price paid for the stock. If you don’t currently own the stock, the price you would use would be the stock’s current price. The dividend yield will fluctuate according to the stock’s share price and the company’s dividend policy. 

Capital Gains Yield

Capital gains yield is the most volatile measure because it is based entirely on the company’s market value. The valuation of a stock can change due to factors that aren’t directly related to the business or its ability to pay dividends. Some of those factors include:

• Macroeconomic issues like interest rates or inflation
• Investor confidence in a sector or the economy
• Mandatory buying and selling of shares through index funds

Even if you have confidence in a particular security’s value, the market may not reflect the capital gains you wish to see right away. 

Total Return

When you combine the dividend yield with the capital gains yield, you’ll get the total return on your investment. Dividends and price appreciation are the two ways to make a profit with investments. 

Capital Gains and Taxes

Another trade-off to consider is the tax implications of your capital gains. The long-term capital gains tax applies when you hold a stock for over 12 months. Depending on your income bracket, that could be up to 20%. 

If you hold a stock for less than six months, you are subject to short-term capital gains taxes, which are even higher. These can reach as high as 37%. Qualified dividends are generally taxed at long-term rates, but ordinary dividends could be taxed at higher rates. 

Special Considerations for Capital Gains Yield

As a measure of investment performance, CGY can be unpredictable. If the share price is below the original purchase price, an investment would generate a capital loss–rather than gains–which could be offset by dividends or interest received.

Likewise, many stocks produce a low CGY but pay high dividends. This happens because every dollar a company pays out in dividends is money that the business is unable to reinvest in growth. 

Other stocks may produce high capital gains but little or no dividends. These may be considered growth stocks, provided the company is reinvesting capital in the business. Understanding these factors, it’s always a good idea to look at the total return on investment as a metric to tell if given security is a worthwhile investment or not.

To learn more about capital gains yield or get answers to other investment or banking-related questions, call our Trust & Investment team at 913.321.4242.