Dividend investing might not be the most popular investing strategy for kids, but it's a great way to spark interest in the stock market.
If you're looking for a safer place to start your kids on their stock market journey, buying dividend stocks is surely something to consider. It's an investment option that can shower your kids with rewards every month or quarter. The experience may even put your child on the millionaire track before retirement. Here's how.
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The power of dividend stocks for kids
Typically, dividend stocks are a hit among older investors who are looking for reliable payouts to fund their lifestyle during retirement.
But these income-producing assets aren't just reserved for retirees; kids can benefit, too! It's the secret ingredient that has helped successful investment manager John W. Rogers Jr., founder of Chicago-based Ariel Investments, build a diversified portfolio of assets and help others do the same.
At the age of 12, Rogers received stocks for Christmas and birthdays instead of the latest toys. It was a game changer on his investing journey -- especially when he was able to spend his recurring income received from dividend-paying stocks any way that he wanted. What's even better is that he didn't have to sell any of his stocks to benefit from dividends.
Although dividend-paying stocks don't produce the biggest returns, it was a great way to get Rogers enthused about investing. It became the foundation for his portfolio, allowing him to sprinkle in more growth stocks and other assets after he developed a basic understanding of how the stock market works. He loved investing so much that he made it his career. Ariel Investments currently has over $16 billion assets under management.
Build your child a million-dollar portfolio
Time is one of the greatest assets working in your children's favor. The earlier you start, the better chance you have of helping them build a million-dollar portfolio.
A child can have a custodial brokerage account that is managed by a parent or other adult. These accounts are a great way to get kids involved in the dividend perks, allowing them to collect extra income on the road to a million. This gives kids some sweet wins they can be proud of on their investing journey.
Let's say you set a goal for your children to earn their first $1,000 in dividend income. This milestone will give your kids a chance to leverage their math skills in the stock market. They will learn how to calculate dividend yield, expected income, and the time it will take to achieve their goals. If kids understand the math behind dividends, they've conquered the basic math needed to calculate their way to $1 million.
For example, if a company pays a $5 annual dividend and your child accumulates over 10,000 shares over time, there will be at least $50,000 in dividend income every year that can be reinvested to buy more shares. Once children add growth stocks and other assets to their portfolios, they can feel comfortable crunching the numbers and pinpointing exactly what they need to do to hit the $1 million mark.
Jump-start your child's portfolio with dividends
Dividends are a great way to get your child started, but you'll want to add on growth stocks and other assets to supercharge a portfolio.
A growth stock is a company that's expected to increase profits at a faster rate than the average business. It's ideal for children since they have a higher risk tolerance and a longer time horizon. Children's portfolios can easily recover from a market setback because they have time working in their favor.
A well-diversified portfolio sprinkled with dividend-paying stocks will serve your child well. The icing on the cake is getting your kids so pumped up about dividends that they start exploring various options that can accelerate their way to the $1 million mark.
