The benefits of investing in stocks

Ask any investor why they own a particular stock, and you may hear about how it feels  to own a piece of a well-known company or receive regular dividends. But how can stocks benefit your portfolio? Let’s take a look.

The case for owning equities

Equities can add diversification and serve as a growth engine to help build value over time:

Higher growth potential — Equities serve as a cornerstone for many portfolios because of their potential for growth. In the chart below, you can see that stocks have a long track record of providing higher returns than bonds or cash alternatives. In fact, large domestic stocks have provided an average annualized return of 9.5 over the last 20 years.

But remember — you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.

The power of compound interest

Compounding can work to your advantage when you invest for the long-term.

When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, for a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years, thanks to the power of compounding.1

Dividend income

Many companies pay dividends on a regular basis, most often quarterly.

Dividends can be used to supplement your income or may be reinvested to buy additional shares:

If you’re using this money as a regular income stream, consider staggering your stocks’ dividend payment dates.

If you reinvest your dividends and buy additional shares of stock, your money has the potential to grow faster.

Keep in mind that dividends can be increased, decreased or eliminated at any point without notice.

Purchasing power protection

Purchasing power is the value of your money shown as the number of goods or services that one unit of money can buy.

Inflation increases the cost of goods and services over time, decreasing the amount your money can purchase.

Equities offer two key benefits that help mitigate the effects of inflation: growth of principal and rising income.

Stocks that regularly increase their dividends give you a pay raise to help balance the higher costs of living over time.