Dividend reinvestment plans may seem boring or confusing to a young child or teenager. But if you’re looking for a nice stocking stuffer to give your grandkids for Christmas, it’s something they’ll likely come to appreciate over time. And I speak from experience.
I’ve always wished that I had started investing at an early age, but I didn’t know anyone who invested when I was a child. Back then, the Savings & Loan institutions (remember them?) made a big deal out of passbook savings accounts for kids, and most parents used those accounts to teach their children about the value of a dollar saved. Of course, I remember a few meltdowns when that dollar had to go into the bank instead of buying a shiny red truck or a new doll!
But since I came so late to investing (as a college graduate), I wanted to make sure my nieces and nephews began learning about investing at a far earlier age. They’re all grown up now, but when they were born, I decided to buy stock for each of them through dividend reinvestment plans (plans issued by corporations that allow investors to reinvest their cash dividends by purchasing additional shares or fractional shares).
My first criterion was to find a dividend reinvestment plan (or DRIP, for short) that would be appealing to kids, which might spike their interest in investing. At that time, there weren’t too many DRIPs available that fit that category, but McDonald’s (MCD) had a good plan, and I knew they loved McDonald’s!
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Over the years, I threw in $50-$100 on each of their birthdays and at Christmas. Every so often, I discussed the plan with them and showed them their statements, but mostly, I received a lot of eye rolls for my efforts! However, when the annual report arrived on my doorstep, they were very interested in the food coupons it contained!
Their interest quickened upon their 18th birthdays, when I presented them with a check from their plans. I think it was a real eye-opener for them to see how money can accumulate over time.
I think DRIPs are a fabulous strategy for children. And with the holidays upon us, I thought it would be a great time to remind everyone that DRIPs are a gift that “keep on giving,” and will be much more memorable in the long-term than toys or games (although those are certainly more appreciated in the near-term!)
As I was reviewing our contributors’ newsletters for recommendations for my Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks, I came across a couple of articles from Charles A. Carlson, editor of DRIP Investor, which offered a fresh look at dividend reinvesting. I’ve combined them, and also included several DRIPs that Charles recommends for stoking your children’s or grandchildren’s appetite for investing. Here’s his take on DRIPs:
“Direct purchase plans offer one way to give the gift of stock. You can open an account in the name of the individual (you will need to know certain information, including the individual’s Social Security number) and make an initial investment.
“The minimum initial investment is usually $250 or less. A number of direct-purchase plans are offered by companies that would resonate with children or grandchildren.
“Since time is so critical to investment success, the more time you have, the better off you are. A 10-year-old who starts setting aside money today will be tomorrow’s millionaire. Look at the numbers: A 10-year-old that invests just $10 a month—perhaps money earned from a paper route or doing chores around the house, or perhaps funds accumulated from birthday or holiday gifts—will see his or her funds grow (assuming an average annual return of 10%) to more than $174,000 by the time he or she reaches age 60. In other words, that total investment of $6,000 over the course of 50 years becomes $174,000. And if he or she can pony up (with a little help from mom and dad) $50 per month, that investment of $30,000 over a 50-year period will turn into more than $873,000.
“Notice that a key component in this investment equation, in addition to time, is the annual return on your investment. I assumed a 10% average annual return—roughly the long-run average return of the market. In order to achieve that return, junior’s money will have to be invested in stocks. Unfortunately, all too often a child’s money ends up in a savings account or certificate of deposit—not bad investments, mind you, but investments destined to underperform stocks over the long term.
DRIPs Are Perfect Investments for Kids
“Dividend reinvestment plans represent an excellent way for youngsters to exploit the power of time in an investment program while earning returns well above alternative investments.
“DRIPs have several advantages for youngsters. Since most dividend reinvestment plans have small minimum investment requirements—Coca-Cola, for example, allows DRIP participants to buy stock with just $10—a child or grandchild should have the financial wherewithal to make periodic contributions. Having a youngster kick in to his or her own investment program is critical in order to get involvement and commitment to the program. And since you deal directly with the company, the child does not have to go through a broker nor endure broker calls.
Dividend Reinvestment Plans: Getting Started
“It is easy to set up an account for a child or grandchild. Companies offering no-load stock plans offer the easiest way to get started since initial shares can be purchased directly from the companies. If you buy the first share of stock through a broker in order to enroll in the DRIP, make sure the stock is registered in an individual’s name, not the “street name.”
“Another way to get a child started is the “buddy system.” Let’s say that you already own shares in Coca-Cola (KO). You can transfer one of your shares from your account to an account set up for your child or grandchild, thus making him or her a registered shareholder and eligible to join the plan. Transferring shares is easy. Just secure a “stock power” form from a broker or the company’s transfer agent. Fill out the stock power form. When you’ve done this, take the form to a bank to receive a “medallion” signature guarantee. Once the form has been stamped with the medallion, return it to the transfer agent. You might want to include a letter stating your intentions and specifying that you would like to enroll the individual directly into the dividend reinvestment plan. Most companies will oblige. The process costs little or no money to complete and is very easy.
“Registering the stock, whether you invest directly via a no-load stock plan or go through the broker to get the first share, is an important consideration when starting a child in the plan. You could merely open an account in your own name. In this way, you control the plan. However, disadvantages to this approach are that you will be taxed on income earned in the plan at your tax rate.
“An alternative is to set up the plan in the child’s name under a Uniform Gifts to Minors Account (UGMA). Funds in the account are in the minor’s name and social security number and are considered to be owned by the minor. Dividends paid on the account are taxable, most likely at a preferred tax rate. The adult custodian is responsible for the account until the minor reaches the age of majority. Any withdrawals from the account are payable to the custodian on the minor’s behalf until that time. However, once the youth has reached the age of majority—18 in many states—control of the account reverts to him or her to do with as he or she sees fit. This is the downside of setting up a UGMA. Parental control is lost at the age of majority. Hopefully, by the time a child reaches 18, the principles of investing are so ingrained that he or she would be reluctant to squander funds that took so long to accumulate. Nevertheless, it is important to understand the pluses and minuses of UGMAs before registering the shares in that form.
Picking the Right Stocks
“Many companies which may be familiar to youngsters offer dividend reinvestment plans. The following table highlights a number of quality companies offering DRIPs which should be appealing to a child or grandchild.
“This aspect of DRIP investing for children is especially important. I think involvement and commitment can be accentuated if a child invests in a company in which he or she is familiar with the firm’s products and services. A child may lose interest if his or her investment is in some company to which the child cannot relate. On the other hand, a child will likely have a great interest in his or her investment if, say the next time he or she goes to McDonald’s or visits a Disney theme park, he or she understands that he or she is an owner of the company.
“Before investing, make sure you obtain a DRIP prospectus so there are no surprises when enrolling a youngster in the plan.”
DRIPs for Kids; Optional Cash Payments (Minimum & Maximum)
Coca-Cola (KO): $10/$120,0000 annually
† Disney (DIS): $50/$250,000 annually
† Exxon (XOM): $50/$250,000 annually
Harley-Davidson (HDI): $30/$100,000 annually
† Hershey Foods (HSY): $25/$250,000 annually
† Home Depot (HD): $50/$250,000 annually
† Mattel (MAT): $100/$100,000 annually
† McDonald’s (MCD): $50/$250,000 annually
PepsiCo (PEP): $50/$120,000 annually
† Wal-Mart Stores (WMT): $50/$150,000 annually
† Initial purchase may be made directly from the firm.
Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.Learn More