Dividend investing is typically reserved for retirees, but that doesn't mean your kids can't get a piece of the action.
John W. Rogers Jr., founder of Ariel Investments, was exposed to the benefits of the stock market at an early age. Instead of getting toys in his stocking, he received stocks that came with additional rewards: Dividends.
This dividend income didn't make Rogers rich overnight, but it did plant seeds that helped him start one of the first Black-owned mutual fund firms in the country. Now, his firm manages $17.3 billion in assets as of Sept. 30, 2021.
If you want to help your kids build a lifetime of wealth and learn valuable money lessons, dividend investing is something to consider. Here's how to get your child pumped about dividend investing by helping them earn their first $1,000.
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Getting started with dividend stocks
Get your kids excited about dividend investing by teaching them how it works.
Dividends are an extra stream of income given to investors on a quarterly or monthly basis. But they don't come automatically. A company's board of directors has to declare a dividend, and a company has to have extra money to distribute funds to shareholders. If a company reinvests 100% of its money back into its business, it won't have any profits to share with investors.
Companies are transparent about their dividend payments. They will let you know in advance how much they are paying and when they are paying it. When developing dividend income goals for your child, you can look at the annual dividend amounts for your favorite stocks to determine how many shares your child would need to reach their goals.
For example, if Nike (NKE -0.74%) pays an annual dividend of $1.00 per share, you would need to buy 1,000 shares of stock to help your child earn their first $1,000.
Open investment accounts for your child
When you're ready to jump-start your kids' investing journey, you can open a brokerage account or individual retirement account (IRA) --depending on your child's annual income.
Let's say you open a custodial brokerage account on behalf of your child. You will control the account as long as the child is a minor. However, you typically won't be on the hook for taxes on dividends received. That's your child's responsibility, which works out in your favor if your child is in a lower tax bracket.
If your child is earning money, they are eligible to contribute to a Roth IRA. This is a great way to put those babysitting, acting, and modeling checks to work. Anyone can contribute up to $6,000 for 2021, but you can't contribute more than you earn for the year. The dividends earned in your child's Roth IRA will be tax-free as long as they don't touch it until they reach age 59 1/2.
The $1,000 game plan
Helping your child reach their first $1,000 in dividend stocks is a world-class math lesson that they will use over and over again. They will have to figure out what stocks to invest in, how much dividend income they want to earn, and how much money they may have to invest.
If you want to start with individual stocks, find companies that your child interacts with every day. Some high-quality blue-chip stocks that your child may be familiar with include Apple, Walmart, Starbucks, and McDonalds. They are also Dividend Aristocrats and Dividend Kings if your child wants to increase their dividend "allowance" every year. Start reviewing earnings reports with them. Then, give your child a chance to calculate key financial metrics such as dividend yield and dividend payout ratio to help them determine how much they will need to invest to reach their goals.
Let's say your child aims to earn $250 in dividend income from McDonald's Corporation (MCD -0.42%). If the company pays an annual dividend of $5.50 per share, your child will need roughly 46 shares to achieve their goal. Your child can buy a certain number of shares every month or take advantage of fractional shares to build their portfolio. Have your child repeat this process with other stocks until they have a master plan to earn their first $1,000 in dividend income.
An unforgettable math lesson
As your child loads up on high-quality growth stocks, they can get rewarded for their patience in the stock market by adding dividend-paying stocks to their shopping list. By challenging your child to reach their first $1,000 in dividend income, they'll get hands-on experience practicing important math concepts that will help them build wealth. On top of that, they will continue to receive dividend income as an investor -- even if they never invest another penny in the stock market.
