What it means
Capital gains yield isolates the price component of an investment return. If a share rises from $80 to $92, the capital gains yield is 15% whether or not it paid a dividend during the year.
It matters because the two parts of return behave differently and are taxed differently. Price gains are usually untaxed until sale, while dividends are typically taxed on receipt, so two investments with the same total return can leave very different amounts in an investor's hands.
In practice analysts use it to compare like with like. A high dividend utility and a non-paying growth company cannot be judged on price movement alone, so breaking return into capital gains yield and dividend yield makes the comparison honest.
The measure also appears inside valuation models. In the standard dividend growth model the expected return on a share equals the dividend yield plus the growth rate of dividends, and that growth rate acts as the expected capital gains yield.
Two nuances are worth noting. Capital gains yield can be negative, which simply means the price fell, and it is specific to a period, so a figure quoted without a time period is not comparable with anything.
The same calculation applies to any asset with a market price, not only shares. Property, commodities, fund units and even a company's own treasury holdings can all be reported this way, which makes it a convenient common language when a board reviews a mixed portfolio of investments.
In practice
Real-world examples.
Example
A pension analyst reviews two holdings bought at the same time. A bank share returned 4% in price and paid a 6% dividend, while a software share returned 14% in price and paid nothing, so both delivered 10% in total but with very different tax and cash profiles.
Example
A finance manager reports on $500,000 of surplus cash placed in a share index fund. The units rose from $25.00 to $26.75, a capital gains yield of 7%, and the report separates this from the 2% distribution so the board can see how much of the gain could reverse.
Example
An employee holding shares from a staff share scheme checks the capital gains yield since the grant date to estimate the gain that will be taxable on sale. The price has moved from $12.00 to $19.20, a capital gains yield of 60%, which helps her plan the timing of a disposal.
Formula
Calculation
Capital Gains Yield = (Ending Price - Beginning Price) / Beginning Price x 100. An investor buys a share at $80.00 at the start of the year and it trades at $92.00 at the end. The capital gains yield is ($92.00 - $80.00) / $80.00 = $12.00 / $80.00 = 0.15, or 15%. If the share also paid dividends of $2.40 during the year, the dividend yield is $2.40 / $80.00 = 0.03, or 3%, so the total return is 15% + 3% = 18%. Had the share instead fallen to $74.00, the capital gains yield would be ($74.00 - $80.00) / $80.00 = -0.075, or -7.5%, and the total return would be -7.5% + 3% = -4.5%.Case study
Seen in the real world.
Lumen Harbour Logistics is a fictional, illustrative listed company used here to show how the split between price and income changes decisions. Its shares begin a year at $50.00 and end at $56.00, and it pays dividends of $1.50 per share across the year.
In this illustrative example an investor calculates a capital gains yield of ($56.00 - $50.00) / $50.00 = 12% and a dividend yield of $1.50 / $50.00 = 3%, for a total return of 15%. A second, income focused investor compares this with a fictional infrastructure trust that paid an 8% dividend yield while its price rose 2%, giving a total return of 10%.
The income investor chooses the lower total return deliberately, because she needs cash now and the 8% arrives without selling anything. The illustrative point is that capital gains yield is neither better nor worse than dividend yield; it simply arrives in a different form and at a different time.
Watch out
Common mistakes.
- Calling the capital gains yield the total return, which understates the performance of dividend paying shares.
- Calculating the yield against the current price rather than the original purchase price, which produces a number that means nothing.
- Comparing a three year capital gains yield with a one year figure without converting both to an annual basis.
Questions
People also ask.
Can capital gains yield be negative?
Yes, a price fall produces a negative capital gains yield, which is then offset to some extent by any dividends received.
Does it include transaction costs?
The basic calculation ignores them, so a careful investor adjusts the purchase price upwards for buying costs and the sale price downwards for selling costs.
How is it different from a capital gain?
The capital gain is a dollar amount, while the capital gains yield expresses that same gain as a percentage of the amount originally paid.
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