Investing In Dividend Growth Stocks For Children

Introduction

We all know that investing in dividend growth stocks can be a great way to build long-term wealth.  What most people don’t realize is the added benefits of investing in dividend growth stocks for children. By investing in dividend growth stocks for your children, you can help them to build a strong financial foundation and learn valuable lessons about saving and investing and it’s never too early to start teaching your children about the importance of investing. 

Getting started early will allow time and compounding to accelerate their wealth and income.  Let’s explore the benefits of investing in dividend growth stocks for children and provide some practical steps you can take now to get started.

Benefits of Investing in Dividend Growth Stocks for Children

1. Compounding Returns: One of the biggest benefits of investing in dividend growth stocks for children is the power of compounding returns. By investing early and consistently, your children can benefit from years of compounding returns that can grow their investments over time.  An example of what is possible, check out this dividend calculator showing a $500 initial deposit and $100 investment per month, invested over 18 years.  These are forward projections and there is no guarantee but having this type of account balance and annual income once your child turns 18 could be life changing for them.  Just imagine if you can do more over time.

2. Financial Literacy: Investing in dividend growth stocks can help teach your children valuable lessons about saving and investing. By involving your children in the investment process, you can help them develop good financial habits that will benefit them throughout their lives.  Many adults polled show a lack of financial literacy, and according to a recent article from annuity.org showed that according to a recent survey conducted by Standard & Poor’s, only 57% of U.S. adults are financially literate.  

3. Long-Term Growth: Dividend growth stocks tend to be more stable and less volatile than non-dividend paying stocks, making them an ideal investment for children. By investing in dividend growth stocks, your children can benefit from long-term capital appreciation and a steady stream of income.  In another recent study by Hartford Funds, dividend growers have outperformed the overall market, with less volatility, over time.

Steps to Invest in Dividend Growth Stocks for Children

1. Set Up a Custodial Account: To invest in dividend growth stocks for your children, you will need to set up a custodial account. This is a special type of investment account that is owned by your child but managed by you until they reach the age of majority.  All the major brokerages offer this type of account and should be very easy to set up for your child or relative.  I personally have custodial investment accounts for each of my children.

2. Choose Investments: Since this will likely be a very long-term investment, there are two approaches you can take: 

​Individual stocks or Exchange Traded Funds (ETFs).  

Individual Stocks. When choosing dividend growth stocks for your children, look for companies with a strong track record of increasing their dividends over time. Typically, you will want to consider companies with lower current dividends but that are regularly growing the dividend quickly.  This dividend growth will compound over the years and will be a larger benefit later than a current higher yielding stock that may not grow as fast.  

ETF investing.  Since this is long term money, it will be hard to predict which individual companies will be leaders 20+ years from now.  Investing in ETFs will allow your investments to adjust to the times and strong companies will remain and the weak ones will be removed over time.

3. Diversify The Portfolio: It’s important to diversify your portfolio to minimize risk. Look for dividend growth stocks across different sectors and industries to create a well-balanced portfolio.  

If investing in individual stocks, my recommendation is to have no more than 5% in any one stock and no more than 15% in any sector of the economy.  Some examples of sectors include technology, financial services, and consumer staples. These guidelines suggest you should have 20 or more individual companies in your portfolio to diversify.

4. Reinvest Dividends: To take advantage of compounding returns, reinvesting the dividends from the investments is a must. This will allow your children to benefit from the power of compounding returns over time.  Since they will not need the income for many years, reinvesting the dividends will supercharge the income growth by buying more shares every quarter.

5. Teach Your Children About Investing: As you invest in dividend growth stocks for your children, take the time to teach them about the investment process. As appropriate for their age, explain how dividends work, and show them how to track their investments over time. By including your children in the investment process, you will be promoting good investing habits, feeling confident with discussing money, and taking personal interest in their financial future. This will help them develop good financial habits that will benefit them throughout their lives.  For my older children, they pick the stocks and ETFs they want to invest in, my younger kids are too young to understand so I have picked a few ETFs for them for now.

Conclusion

Investing in dividend growth stocks for children can be a great way to teach them about the importance of saving and investing. By starting early and investing consistently, your children can benefit from years of compounding returns and develop good financial habits that will benefit them throughout their lives. By following the steps outlined above, you can help your children build a strong financial foundation and set them on the path to long-term wealth.