There are various metrics used in measuring how well an investment is performing. One commonly referenced is the capital gains yield (CGY). This is a figure that helps investors understand how much of their return is due to an increase or decrease in asset price. Unlike other metrics like dividend yield or interest income, this number focuses solely on the price change of the security or other types of assets over time.
This makes it particularly relevant when analyzing growth-oriented investments, such as equities or real estate, where the primary objective may be capital appreciation rather than income. Below, Realized 1031 has shared a guide to help you out. Let’s take a closer look.
Capital Gains Yield Definition
What is capital gains yield? It’s a metric that measures the increase or decrease of an asset’s price compared to its cost basis. The number reflects how much profit or loss you made from the appreciation or depreciation of an asset, and the value will not include other income you received, such as dividends. In simple terms, CGY tells you how much your investment’s price has changed in relation to what you originally paid.
This metric, expressed as a percentage, is commonly used for growth-focused assets, such as stocks or real estate, where investors aim to profit from rising prices. For example, if you purchase a stock at $100 and it rises to $120, your capital gains yield is 20%. Conversely, if the price falls to $90, your CGY is -10%.
It is important to note that CGY represents only one component of total return. Another consideration of the CGY is that it’s a snapshot of a specific period. The number can change over the span of weeks or months, so it’s also important to consider the holding period of the asset with other metrics such as dividend yield and total return.
Capital Gains Yield Calculation
The CGY formula employs the rate of change formula. As such, calculating the percentage will require knowing the cost basis and the current fair market value of the asset.
Capital Gains Yield = ((current market price – original cost basis)/original cost basis) x 100
Let’s try it on the example we shared above.
Stock current market price = $120
Stock purchase price = $100
(($120-$100)/$100)*100 = 20% CGY
This means that your property’s CGY is 20% at the time of your calculation. The number shows how much your stock’s price has increased since you purchased it.
The same formula can be used for calculating loss in CGY
Stock current market price = $90
Stock purchase price = $100
(($90-$100)/$100)*100 = -10% CGY
10% expresses the loss of your asset’s value over a period of time since you acquired it.
The CGY formula can be used for any asset whose value fluctuates over time, including stocks, bonds, or even property values. While CGY can help illustrate price performance, it does not reflect total return and should be used in conjunction with other metrics when evaluating investments.
Capital Gains Yield Examples
Let’s take a look at real-world examples of CGY to further illustrate how it’s calculated.
On December 1st, 2022, Netflix stock was $316.95. The value was higher on December 1st, 2023, closing at $465.74. Following these numbers, we can calculate the annual CGY as:
((465.74 – 316.95)/316.95)*100 = 46.94%
This percentage reflects the asset’s price appreciation over the specified time period, not accounting for dividends or other returns. This example is for illustrative purposes only and does not constitute a recommendation to buy or sell any security. Past performance is not indicative of future results. All performance data is based on historical market prices and does not reflect the impact of transaction fees, taxes, or other costs.
Comparing Capital Gains Yield vs. Dividend Yield vs. Total Return
While capital gains yield (CGY) reflects the percentage change in an asset's price over time, it is just one component of investment performance. Understanding how CGY compares to other return measures can help support a more complete analysis.
CGY vs Dividend Yield
While CGY reflects the percentage increase or decrease in an asset’s price, dividend yield represents the income an investor earns from dividends, expressed as a percentage of the purchase price. For real estate investments, the equivalent is the rental income yield.
As an example, let’s say that a stock may have 0% in CGY, but if the dividend yield is 15%, then the asset can still be considered profitable.
CGY vs Total Return
If you want a full picture of performance, you’d calculate the total return, which combines both CGY and dividend yield.
CGY + Dividend Yield = Total Return
CGY for Stock (10%) + Dividend Yield (15%) = Total Return (25%)
You earned a 25% return from the increase in the value of your stock plus the income it generated in dividends. However, this income does not offset potential losses unless the asset is sold or evaluated in terms of total return.
Importance of CGY in Investment Analysis
Capital gains yield (CGY) may be particularly relevant for investors who prioritize capital appreciation over income. It isolates the change in an asset’s price over time, helping assess how market value has moved independently of dividends, interest, or other income streams.
Growth-focused investors may find CGY helpful in evaluating stocks, mutual funds, or real estate that have experienced notable price movement. When comparing multiple assets, capital gains yield can highlight which one is outperforming in terms of raw price growth. It may also be used as one component in benchmarking or investment screening processes.
That said, CGY is just one of many metrics investors use when analyzing asset performance, and its value is enhanced when viewed in conjunction with total return, risk-adjusted return, and other financial indicators.
Limitations of CGY
While CGY offers insight into an asset’s price movement, it has important limitations. It only measures change in price over a defined period and does not account for income, such as dividends or rental payments, or external factors like taxes and fees.
Another drawback is that CGY can be volatile over short periods. A stock might show a high CGY one month and a negative yield the next. This fluctuation can lead to misleading conclusions if used without context.
Finally, there’s the fact that CGY doesn’t reflect inflation or changes in purchasing power. What this means is that an asset with a positive yet modest CGY may not be profitable if inflation rates are still high.
Given these limitations, the best practice is to analyze CGY with other metrics. This can offer a more complete picture of an investment’s historical and potential future behavior.
Wrapping Up: What Is Capital Gains Yield?
The CGY represents how much an asset has increased in value over a period of time, represented as a percentage of the original cost. It can be a helpful measure for evaluating the price appreciation component of an investment’s performance.
For investors focused on capital growth, CGY may serve as one of several metrics used to assess how an asset’s market value has changed over time. However, because CGY does not include income, fees, or taxes, it is best interpreted alongside other performance indicators—such as dividend yield, total return, and inflation-adjusted returns—to provide a more comprehensive view of investment results.
Additionally, it is important to recognize that CGY can vary significantly depending on the time horizon selected for analysis. Short-term fluctuations may overemphasize volatility, while longer-term views may help identify general price trends. As a result, investors should consider both the duration and context of the measurement period to ensure that CGY insights are relevant to their specific investment objectives and risk tolerance.
Examples provided for illustrative purposes only and do not represent an investment recommendation. Past performance is not indicative of future results. Individual outcomes will vary based on market conditions and investor circumstances.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. All examples provided are hypothetical and for informational purposes only. Past performance is not indicative of future results and does not represent a recommendation of any security or strategy.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.investopedia.com/terms/c/capitalgainsyield.asp
https://www.investopedia.com/terms/r/rateofchange.asp
https://ir.netflix.net/stock-information/historical-stock-quote/default.aspx
