While it's probably representative of how big a financial geek I am, opening a custodial account for my eight-year-old daughter has been a surprisingly fun and fulfilling experience. Whether she decides to use the money for college, traveling, or a new home, or leave it alone and start funding her retirement with her account, she will be better positioned to follow her dreams.
Best yet, besides the financial benefits, this custodial account could be a learning opportunity for her regarding how businesses work or even investing in companies themselves. While the last thing I want to do is ruin the whimsy of childhood, I can still show that many of the things she loves and uses in her daily life can also be invested in -- not just bought.
By buying an array of businesses that she encounters in her day-to-day life or that operate near her hometown, I'm hoping to not only build a financial nest egg for her, but to also open her eyes to the world of investing all around her.
My daughter's eight-stock portfolio
Adhering to a variation of the Gardner-Kretzmann Continuum -- which loosely suggests owning one stock for every year you are old -- I have focused on adding to seven core positions for my daughter's custodial account. They are:
- IDEXX Laboratories
- Pool
- Chipotle Mexican Grill
- Union Pacific
- The Coca-Cola Company
- Boston Omaha
- Casey's General Stores
As a collection of things she loves (quesadillas, pizza, an occasional Coke, pools, and animals) and businesses she often encounters (Union Pacific's trains and Boston Omaha's billboards), her portfolio is a mixture of various life experiences.
Since she recently turned eight, it was time to find our newest selection for her portfolio to keep her Gardner-Kretzmann score at 1.0. In discussing our potential addition around the Halloween season, perhaps it was too perfect that we decided to go with the United States' leading confectionary juggernaut: The Hershey Company (HSY -0.53%).
Why Hershey is a perfect fit for her account
Much like Coca-Cola was an easy pick for my daughter's portfolio as it is instantly recognizable, easy to understand, and a good lesson on brand power, Hershey was a no-brainer selection -- especially around Halloween time. While her true chocolate love is Mars' Dove dark chocolate, that company is privately held, meaning we cannot invest in it.
So we turned to Hershey, which was deemed a good pick by my eight-year-old after she found out that it is also home to the Jolly Rancher candy and Ice Breaker gum brands -- a couple of her other road trip favorites.
Furthermore, from an investment perspective, Hershey is a recession-proof, income-generating stock that continues to help build out the dividend growth potential in her custodial account. With 13 years of consecutive dividend increases, Hershey is one of the most recognizable brands in the U.S. chocolate industry and maintains an impressive 45% market share.
With a total return of more than 44,000% since its initial public offering in 1978, Hershey's leadership positioning and top-tier brand power make it a brilliant stable holding for my daughter's core portfolio.
The cherry on top of it all?
The timing of these new Hershey purchases looks fantastic.
Why Hershey makes sense right now
Down 31% in just the last six months, the usually resilient confectionary giant is trading at a rare discount. With worries surrounding the company's slowing sales growth rates as GLP-1 weight-loss drugs threaten to eat into Hershey's profits, the market has taken a wait-and-see stance on the stock.
This has sent Hershey's price-to-earnings (P/E) ratio of 20 to its lowest level since 2019 and well below the S&P 500's average of 25.
HSY PE Ratio data by YCharts
However, while GLP-1s could affect the total volume of Hershey's sweets sold, it is unlikely to destroy its stellar 17% net profit margin. In fact, it could be a net positive in a weird way for Hershey. Should portion sizes need to be reined in, the company could be put in a situation of "forced shrinkflation," where it downsizes servings to accommodate new diet trends but maintains similar pricing -- thus boosting profits.
Traditionally, shrinkflation is a mildly malevolent tactic used by consumer goods companies to sell less of a product for the same price, all in the name of increasing profit margins. Although it wouldn't be done with this intent in Hershey's case, this is ultimately what it may be "forced" to do should GLP-1s become widely adopted worldwide. On the other hand, this discussion may all be for naught, as it has been a historically lousy proposition ever to doubt the American eater.
Regardless of the outcome, the beloved Hershey brand is going nowhere -- in a good way. With Hershey trading at what could be a once-in-a-decade valuation, I am beyond excited to add this 2.3% dividend yield to my daughter's portfolio and hold for the next decade and beyond -- learning as we go.
