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CFA Level I Exam · Sources of Equity Returns

Dividend Yield, Capital Gains Yield and Dividend Reinvestment

Updated 7 October 2026 · Fact-checked

Dividend yield is dividends received divided by the starting price. Capital gains yield is the price change divided by the starting price. Their sum is the total return. If dividends are reinvested, each dividend buys more shares, so the cumulative return is the product of (1 + period return) terms, minus 1.

Understand Dividend Yield, Capital Gains and Reinvestment

A share gives you money in two ways. The company may pay you a dividend. The share price may also rise or fall. These two sources are the building blocks of equity return.

Dividend yield measures the income part. You divide the dividend by the price at the start of the period. Capital gains yield (also called price return) measures the price part. You divide the change in price by the price at the start. Add the two and you get the total return for the period.

The key point is that both use the beginning price as the base. A share bought at 50 that pays 2 and ends at 54 has a dividend yield of 4% and a capital gains yield of 8%. The total return is 12%.

Now think about what you do with the dividend. If you spend it, your return is just the sum above. If you reinvest it, you buy more shares. Those extra shares then earn their own dividends and price changes. Over several periods this compounding makes the total return larger than the price return plus the simple sum of dividend yields.

Do not confuse dividend yield with the dividend payout ratio. Yield compares the dividend with the share price. Payout ratio compares the dividend with the company's earnings (dividends ÷ net income, or DPS ÷ EPS). Yield is about the investor's return. Payout is about the company's policy.

Key formulas to remember

Dividend yield
Dividend yield = D ÷ P₀
D is the dividend per share received in the period. P₀ is the price at the start of the period.
Capital gains yield (price return)
Capital gains yield = (P₁ − P₀) ÷ P₀
Negative if the price falls. Uses the beginning price as the base.
Single-period total return
Total return = (P₁ − P₀ + D) ÷ P₀ = capital gains yield + dividend yield
Assumes the dividend is received at the end of the period and is not reinvested within it.
Cumulative total return with reinvestment
(1 + R₁)(1 + R₂)...(1 + Rₙ) − 1
Each Rₜ is the total return for period t, with dividends reinvested at that period's end price.
Shares from reinvestment
New shares = D × shares held ÷ price at reinvestment date
Use the price on the date the dividend is reinvested, not the starting price.
Dividend payout ratio
Payout ratio = DPS ÷ EPS = dividends ÷ net income
A company measure. It is not the same as dividend yield.

How to solve Dividend Yield, Capital Gains and Reinvestment questions

Use this method for any question on dividend yield, price return or reinvestment. Write each number down before you calculate.

  1. 1Identify what is asked: dividend yield, capital gains yield, total return for one period, or cumulative return over several periods.
  2. 2List the beginning price P₀, ending price P₁ and dividend D for each period. Note when each dividend is paid.
  3. 3Compute the dividend yield as D ÷ P₀ and the capital gains yield as (P₁ − P₀) ÷ P₀. Always divide by the beginning price.
  4. 4Add them for the single-period total return, or compute (P₁ + D) ÷ P₀ − 1 directly.
  5. 5For several periods with reinvestment, convert each period's return to a growth factor (1 + R) and multiply the factors, then subtract 1.
  6. 6Alternatively, track shares: each dividend buys D × shares ÷ price new shares. Final value = final shares × final price. Return = final value ÷ initial value − 1.
  7. 7If the question asks for an annual figure, take the nth root of the cumulative growth factor and subtract 1.
  8. 8Check the answer against the options. The reinvested return should be a little above the no-reinvestment return when dividends are positive and the price rises.

Quickest way: Growth-factor shortcut

When to use it: Use it when a question gives prices and dividends for two or three periods and asks for a cumulative or annualized return with reinvestment.

  1. For each period, compute (P₁ + D) ÷ P₀. This is the growth factor already.
  2. Multiply the factors on your calculator without rounding in between.
  3. Subtract 1 for the cumulative return.
  4. For an annual figure, use the yˣ key with 1 ÷ n. On the BA II Plus, enter the factor, press yˣ, enter 1 ÷ n, then = and subtract 1.
  5. As a rough check only, add the period returns. When returns are positive, the compounded answer should be somewhat higher than that sum. Do not eliminate an option just because it equals the sum; always compute the answer.

Common mistakes in Dividend Yield, Capital Gains and Reinvestment

  • Dividing the price change by the ending price.

    The latest price feels like the current value, so students use it as the base.

    Fix: Capital gains yield and dividend yield both use the beginning price P₀.

  • Confusing dividend yield with the payout ratio.

    Both involve dividends and sound alike.

    Fix: Yield has price in the denominator. Payout ratio has earnings in the denominator. Ask yourself whether the question is about investor return or company policy.

  • Adding period returns to get a multi-period return.

    Adding is simple and works for one period.

    Fix: Multiply growth factors (1 + R) across periods, then subtract 1. Adding ignores compounding.

  • Reinvesting the dividend at the starting price.

    Students reuse the first price they see.

    Fix: Use the price on the reinvestment date to find how many shares the dividend buys.

  • Forgetting that a falling price gives a negative capital gains yield.

    Students focus on the dividend and treat the price effect as a gain.

    Fix: Keep the sign. A 3% dividend yield with a 5% price fall gives a total return of −2%.

  • Rounding each period's return before multiplying.

    Students want tidy percentages.

    Fix: Carry full precision through the multiplication and round only at the end.

Worked examples

Example 1

A share is bought at €40. One year later it trades at €43.20 and has paid a dividend of €1.60 during the year. What is the total return, and which of the following is the capital gains yield: 4.0%, 8.0% or 12.0%?

Show the solution
  1. Dividend yield = 1.60 ÷ 40 = 0.04, or 4.0%.
  2. Capital gains yield = (43.20 − 40) ÷ 40 = 3.20 ÷ 40 = 0.08, or 8.0%.
  3. Total return = 4.0% + 8.0% = 12.0%.
  4. The capital gains yield is the 8.0% option.

Answer: Capital gains yield is 8.0%. Total return is 12.0%.

Example 2

You buy 100 shares at $50. At the end of year 1 the share pays a dividend of $2 per share and trades at $55. You reinvest the dividend at $55. At the end of year 2 the share pays $2.20 per share and trades at $60. What is the cumulative return over two years: 28.9%, 32.0% or 35.0%? (Assume year 2 dividend is also reinvested at $60.)

Show the solution
  1. Initial value = 100 × 50 = $5,000.
  2. Year 1 dividend = 100 × 2 = $200. Shares bought = 200 ÷ 55 = 3.63636. Shares held = 103.63636.
  3. Year 2 dividend = 103.63636 × 2.20 = $228.00 (approximately). Shares bought = 228.00 ÷ 60 = 3.80. Shares held = 107.43636.
  4. Final value = 107.43636 × 60 = $6,446.18.
  5. Cumulative return = 6,446.18 ÷ 5,000 − 1 = 0.2892, or about 28.9%.
  6. Check with growth factors: year 1 = (55 + 2) ÷ 50 = 1.14. Year 2 = (60 + 2.20) ÷ 55 = 1.13091. Product = 1.28924, so 28.9%, which is the first option.

Answer: 28.9%

Exam tips

  • Questions are three-option MCQs with numbers listed smallest to largest. Compute the answer first, then match. Do not guess from the order.
  • The base for yield is almost always the beginning price. Check this first when two options differ slightly.
  • If a question gives period total returns, go straight to multiplying growth factors. It is faster than tracking shares.
  • When a question mixes payout ratio and dividend yield, read the denominator: earnings means payout, price means yield.
  • With no penalty for wrong answers, never leave a question blank. If time is short on a multi-period reinvestment question, estimate the sum of the period returns, expect the true answer to be somewhat higher, and pick the closest option. Treat this as a rough check only, not a way to rule options out.

Practice questions from Sources of Equity Returns

Dividend Yield, Capital Gains and Reinvestment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dividend Yield, Capital Gains and Reinvestment: frequently asked questions

What is the formula for dividend yield and capital gains yield?

Dividend yield is D ÷ P₀. Capital gains yield is (P₁ − P₀) ÷ P₀. Both use the price at the start of the period, and together they equal the total return for a single period.

How does dividend reinvestment affect total return?

Reinvested dividends buy extra shares that earn future dividends and price changes. This compounding raises the cumulative return compared with spending the dividends. The effect grows with longer holding periods and higher dividend yields.

How do I calculate the return with reinvested dividends?

Find each period's total return as (P₁ + D) ÷ P₀ − 1. Convert to growth factors, multiply them across periods and subtract 1. You can also track the number of shares and compare the final value with the initial investment.

What is the difference between dividend yield and dividend payout ratio?

Dividend yield is the dividend divided by the share price and shows the income return to an investor. The payout ratio is the dividend divided by earnings and shows how much of profit the company pays out.