Thinking of Adding Stocks in Your Investment Portfolio? You Have Options.

Building a durable investment portfolio requires discipline and foresight. Selecting assets that appreciate while also yielding income is a winning combination, especially for younger investors with time on their side. Equities often comprise a major portion of an individual investor’s investment portfolio. In fact, some investors rely exclusively on a 60/40 portfolio (stocks and bonds, respectively), while others prefer an all-stock portfolio (100% equity allocation). While everybody’s risk tolerance differs to a degree, it’s probably wise to have some equity exposure in a portfolio to avoid the opportunity cost of lost gains.
There are three main types of equity to consider when building an investment portfolio: index funds, dividend-paying equities, and growth equities.
An index fund is a type of mutual fund or ETF that passively tracks a specific market benchmark rather than attempting to outperform it. For example, a popular benchmark for many index funds is the S&P 500, a broad index comprising the 500 largest publicly traded companies in the United States. Index funds hold a slice of all the companies in their benchmark. Index funds offer a low-cost, low-maintenance way to diversify across a range of industries and sectors. Jack Bogle, one of the leading founders of the index industry and founder of Vanguard Group, once quipped, “Don’t look for the needle in the haystack. Just buy the haystack!”
Due to the broad market exposure index funds provide, index funds’ long-term average annual gain is nearly 10%. Fidelity, Vanguard, and BlackRock represent some of the largest index fund providers in the U.S. While index funds offer a plethora of advantages in low-cost diversification, they also suffer from two negatives: inability to beat the market (investors can only match it with an index fund) and broad exposure to a market downturn.
While most individual investors are poor stock pickers, there’s still some value to having a few individual stocks in an investment portfolio. One great addition to an investment portfolio is dividend-paying stocks. Dividend-paying stocks are mature companies with reliable cash flows. Companies in this position can return excess cash flows to shareholders through dividends. As an income-producing asset, dividend-paying stocks offer both capital appreciation and yield.
Companies that increase dividends are historically strong performers, averaging a 10.2% annual return over the last 50 years. Investors need to be wary of high-yield dividend companies for two reasons: First, the dividend payout ratio may be unsustainable depending on the company’s business model; Second, high-yield dividend stocks tend to underperform the broader market during growth-led market cycles.
Throughout the U.S. stock market’s history, dividend-paying stocks have contributed significantly to investors’ overall returns. Even investors who do not have a yearning for yield may want to consider this equity type when constructing their portfolio. Although selecting individual dividend stocks feels like a daunting task, there are a few options at your disposal if you want to add some yield exposure to an investment portfolio. Investors who desire stability should research the Dividend Aristocrat list to find a dividend-paying stock that fits their fancy. Dividend Aristocrats are stocks that have continually increased their base dividend every year for at least 25 consecutive years.
If you prefer yield but not selecting from a list of companies, you can purchase a dividend aristocrat exchange-traded fund (ETF). ETFs are investment funds that hold a collection of assets and trade on a stock exchange like a single stock. ETFs differ from mutual funds because an investor can sell an ETF during the trading day, whereas a mutual fund has restrictions on when transactions clear.
Are you hungry for growth potential rather than yield? Growth stocks may be in your wheelhouse if that description describes what intrigues you the most when constructing an investment portfolio. Over the last two decades, technology and, more recently, artificial intelligence, have dominated the growth-oriented sector of the stock market.
Growth stocks tend to be more volatile than their dividend-paying counterparts. Therefore, while stocks may offer explosive returns to the upside over a sustained period, they may also experience significant pullbacks during volatile market conditions. That said, growth stocks can help an investor round out a portfolio, especially younger investors who prefer capital appreciation over income potential. As a growth stock matures over time, it may transform into a stable, dividend-paying stock. Recent examples of technology companies that are emerging as sought-after dividend-paying stocks include Microsoft and Meta.
This list is not exhaustive of equity options an investor can consider in their investment portfolio. Rather, it’s a good launching pad for an investor who wants to build a diversified portfolio of equities that align with their risk tolerance. So, it’s totally fine if an investor only prefers one or another on this list. And it’s equally satisfying if an investor desires to build an investment portfolio with all three options. What is most important to understand is that investors have the discretion to create a pathway that meets their future financial goals. That’s the beauty of financial literacy.
As always, individuals who have questions about investing should consult a certified financial planner.