Growing Your Wealth
Growing your wealth is mathematically simple: invest in securities that rise in value over time, invest in securities that pay a dividend or yield, or invest in combination of the two.
Capital gains are the returns you get when the value of your investment rises. For example, if you were to buy a home worth $100,000 today and, by the end of next year, it gets appraised with a value of $120,000, you would get a 20% return on the value of your home.
Up until the point you sell the asset - in this case, your home - we call those gains unrealized. Once you have sold the house, you realize the gains. It is important to distinguish between the two, because until you realize the gain, your profit is only hypothetical, and can change.
Capital gains play a significant role in growing wealth. Investors who purchased a basket of stocks that tracked the returns of the S&P 500 from January 7, 2005 to January 02, 2015 would have received a gain of 69.83%. In other words, if they had invested $100,000 in 2005 and sold it in 2015, they would have realized a gain of $69,830, even before potential dividends or other additional returns.
Dividends are part of a company's profits which are paid to shareholders. Usually paid quarterly, dividends can provide investors with a stream of income. Dividends are related to equity assets, like stocks. Dividends are announced by company boards, and will typically be paid directly to the shareholder's brokerage account.
As of 2018, the average dividend yield on large companies was 2.00%. This means that by investing in the stocks of big companies, an investor won’t just participate in the capital gains of their investment - they will also receive the dividends paid on each share they own.
Bonds and other fixed income securities pay yields, or a coupon, to investors. A yield is the annualized interest rate based on the face value of the bond. For example, if you purchase a bond for $1,000 with a yield of 6.5% that lasts for five years, you will be paid $65 for all five years, plus the face value of the bond (the $1,000 you paid for it). The total return on your bond investment would be 32.5%.