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Give Your Kids a Gift That Can Last a Lifetime: Dividend Stocks

By Charlene Rhinehart, CPA - Dec 24, 2020 at 8:13AM

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It might not be the most glamorous gift, but a portfolio of dividend stocks will pay off over time.

Are you wondering what to give your kids for the holidays? Just do what John Rogers Jr.'s father did: Buy stocks as gifts. At age 12, Rogers received stocks instead of toys for birthdays and Christmas. This put him on the path to becoming founder of the first African American money management firm in the country's history. Now, at age 62, he manages billions in assets as the chairman, co-CEO, and chief investment officer of Ariel Investments, and helps others gain access to wealth-building opportunities. 

Rogers's success is not a secret: His father invested in high-quality dividend stocks that rewarded him with income every quarter. Although it may be tempting to chase after the hottest stocks in the market, building your kids a portfolio that includes dividend stocks ensures one thing -- a chance to have an extra stream of income flow into their accounts forever, as well as access to valuable money lessons.  

Amazed little girl opening Christmas gift near Christmas tree.

Image source: Getty Images.

The best gifts aren't always glamorous 

Stock certificates might not be as exciting as unwrapping the latest tech gadget, but investing in the stock market opens kids up to a lifetime of benefits they'll never forget. 

During an interview at University of Richmond's Robins School of Business, John Rogers shared his experience getting stocks for Christmas:

It wasn't fun going to that Christmas tree and getting the envelope. But the nice thing my dad did was let me keep the dividend checks. Every three months, I would get a check in the mail from one of the blue chip stocks that he bought me and he said I could spend it any way I wanted. That started my love affair with the stock market.

If your kids are persistent about getting a new toy, they can use their dividends to make their next purchase. 

Dividend stocks come with great incentives 

You can think of dividends as a bonus that shareholders receive for purchasing company stock and holding it for a period of time. Typically, an investor would have to sell the stocks in their account to see any cash in their hands. But there are popular companies like Nike, Apple, and Walmart that compensate you with dividends every quarter -- you're getting a recurring stream of income for being a patient and loyal investor. Your kids can set their calendars every quarter and be on the lookout for the next dividend payment that will flow into their accounts. 

If you prefer to give your children a few dividend stocks that produce monthly income, you can count on a company like Realty Income to deliver a consistent, high dividend because it's a real estate investment trust (REIT), which are required to pay out 90% of their taxable income as dividends to maintain their status. 

There's no limit to the amount of dividends your child can receive. As long as a company's Board of Directors declares dividends, your child will have access to one of the simplest strategies used to build wealth over time.  

An automatic pay raise your kids will love 

Although your kids may be tempted to cash in on stocks to buy their favorite toys, they'll think twice about their decisions when they start receiving extra money in their accounts every year. That's the power of investing in dividend-growth stocks. Companies that are committed to increasing their dividend every year are excited to reward investors with an "automatic pay raise" -- a perk that every investor gets no matter how many company shares they own. 

Let's say your child has 1,000 shares of a stock in a company that pays an annual dividend of $1. They'll receive $1,000 in dividends during year one. If the company raises the annual dividend to $1.25, your kid will receive $1,250 in dividends during year two. 

Just imagine the look on your child's face when they see extra income in their account. This is an easy way to incentivize kids to save and invest so they can add more dividend growth stocks to their portfolio. 

An unforgettable lesson in patience 

Rogers is known for saying, "Every game is won with patience." For many, this one piece of advice is the key to going from poverty to plenty. For your kids, it can be the secret to becoming a financially responsible adult. 

Dividend stocks might not sound like the fun, energy-powered growth stocks you may hear about in the news every day, but they offer a steady stream of income that can grow over time. Although kids may prefer receiving a toy now, they'll learn a valuable lesson on their dividend journey: Instant gratification is a temporary gift, while long-term investing is a present they can unwrap for a lifetime. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$137.51 (1.51%) $2.04
Apple Inc. Stock Quote
Apple Inc.
$161.84 (-1.17%) $-1.92
NIKE, Inc. Stock Quote
NIKE, Inc.
$170.24 (0.14%) $0.24
Realty Income Corporation Stock Quote
Realty Income Corporation
$67.25 (-0.40%) $0.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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