Final answer:
The average rate of return for stocks, informed by historical data from the S&P 500 index, includes dividends and capital gains, with dividends generally around 4% from the 1950s to the 1980s, but decreased to 1% to 2% since the 1990s. The potential higher returns on stocks compared to other investments compensate for their higher risk.
Step-by-step explanation:
The question pertains to the average rate of return for stocks recommended by a broker, specifically looking at the historical data of the S&P 500 index as a reference.
The average rate of return is a key indicator in business and finance and encompasses the profits made on an investment over a specific period.
This rate includes two components: dividends and capital gains. Historically, from the 1950s to the 1980s, average dividends were around 4% of the stock value.
However, since the 1990s, this return from dividends has declined to about 1% to 2%. Capital gains, on the other hand, have seen more fluctuation and have been responsible for the bulk of returns since the 1980s.
In understanding investment choices, there's always a tradeoff between the expected rate of return and the level of risk involved. Lower risk options like bank accounts offer lower returns, while higher risk options like stocks offer the potential for higher returns.
This potential for higher returns on stocks is what compensates for the greater degree of risk involved. If stocks did not offer a higher average return, they would be less attractive to investors.