If you have young kids or grand kids you have probably thought about ways of teaching them early about money. Teaching them how to invest is an integral piece of the money puzzle. Early exposure to investing teaches them about how business works, the difference between an asset and an expense, financial responsibility and the most magical concept in finance: compounding.
Stocks are great for teaching kids about the investing process, business and profits as well as the concept of ownership of a business. You may not want to open a brokerage account for young kids for them to buy stocks. It is just too easy for the kids (and most adults) to start speculating. The easiest way to get them started is by using what are called DRIPs. DRIPs stand for Dividend Re-Investment Plans and are offered by many well established and solid companies. They allow you to buy stock directly from the companies, and as the name suggests, any dividends paid can be re-invested back into the company stock automatically.
Why Investing for Kids with DRIPs make sense?
There are several key features that make DRIP investing ideal for kids.
- Most DRIPs have low investment requirements. In some cases, you can invest as little as $10 per month. This is great for kids who may not have too much disposable money to invest.
- Generally you do not pay a transaction fee or a brokerage fee for additional investments. Low costs means higher returns over a period of time.
- Automatic reinvestment of dividends. This can be very powerful as the children can see how over time their investments are compounding both in value and in the number of shares they hold. It also provides a direct correlation to the value of their investments with the profits of the companies they have invested in.
- DRIPs require physical stock certificates which can be very empowering and tangible to kids as a reminder that they own part of a real business. Stock certificates are also effective in curbing impulse selling and will force the kids to look long term in their investments.
How to Start a DRIP Account for Your Kids?
Starting a DRIP account is not difficult. Most companies require you to own atleast 1 share of stock that is registered in your name, or in this case in the name of the child. Once this share is purchased and a stock certificate obtained, you can contact the company directly to enroll in their DRIP program. Be sure to check the Investor Relations part of their website as well, as it might have more information on how to enroll or may even allow you to enroll in the DRIP program directly through the web.
There are a few ways you can buy the initial share of stock. You can open a discount brokerage account in your kids name, buy the share and than have them send it to you in the certificate format. Different brokers have different fees for buying a stock and registering them (to get a certificate), so you will need to check them with your broker. There are also specialty sites like OneShare and GiveAShare that will let you buy a single share of stock and register it to anyone you like.
There are also many companies who will let you buy the initial shares directly through them as you start the DRIP program. Regardless of how you do it, look into setting up a UGMA account for your child. That way the income will be taxed at the child’s rates and not your own.
How to Find Best DRIP for Children
Think about the products and services that your children are familiar with and will get excited about owning a part of the company. It may be Coca Cola or McDonald’s or Disney. Something that will remind them of their ownership as they go through their daily lives. These are the stocks that will most keep their interest. Listed below are a few stocks that you might consider. We have noted where you can buy the 1st share directly from the company:
Regular Investment Minimums
|Coca-Cola (NYSE: KO) (800) 446-2617||$10|
|Disney (Walt) (NYSE: DIS) (800) 948-2222||$100 – 1st share direct|
|Exxon (NYSE: XON) (800) 252-1800||$50 – 1st share direct|
|Harley-Davidson (NYSE: HDI) (800) 637-7549||$30|
|Hershey Foods (NYSE: HSY) (800) 842-7629||$100 – Direct|
|Home Depot (NYSE: HD) (800) 928-0380||$25 – Direct|
|Intel (NASDAQ: INTC) (800) 298-0146||$25|
|Mattel (NYSE: MAT) (888) 909-9922||$100 – Direct|
|McDonald’s (NYSE: MCD) (800) 774-4117||$100 – Direct|
|PepsiCo (NYSE: PEP) (800) 226-0083||$25|
|Sony (NYSE: SNE) (800) 749-1687||$50 – Direct|
|VF Corp (NYSE: VFC) (800) 446-2617||$10|
|Wal-Mart Stores (NYSE: WMT) (800) 438-6278||$50 – Direct|
|Wrigley (Wm.) (NYSE: WWY) (800) 446-2617||$50|
As is the case with any investment, be sure you read the prospectus first and research the company before you decide to invest. You can get the kids involved in reading the annual reports as well.
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Shailesh Kumar is an Entrepreneur, investor and blogger. He writes about value investing at Value Stock Guide. Learn about the stock market and discover the techniques proven to work best for long term investors for finding appropriate stocks to buy in their portfolio to get superior risk adjusted returns.