The Best Stocks for Kids

Photo: Carissa Rogers, Flickr

This article was updated on Nov. 3, 2014.

Want to give your child a million dollars, but your bank account can only spare $1,000? Then give her some stock -- or better still, spark a lifelong interest in the stock market.

It's not crazy to think about a million dollars if you're dealing with kids or young adults, because they are far richer than the rest of us in a vital wealth-building ingredient: time. A 15-year-old has a full 50 years before she hits the standard retirement age, and that's enough time to turn $1,000 into almost $120,000 if it grows at the market's long-term annual average growth rate of roughly 10%. If you start a 5-year-old off with a $3,500 investment and it grows for 60 years, it can top $1 million.

All these elements can be tweaked. If you keep adding money over the years, the account will grow much faster. If you start earlier or later, start with a larger or smaller sum, or your overall average growth rate is higher or lower than 10%, the results will also differ.

How you get your kids involved in investing is up to you. You can use discount brokerages, for example, or you can go through Drips -- dividend reinvestment plans -- among other options. (If your child has earned income, perhaps look into a Roth IRA.)

What to buy
The next question is: What are the best stocks in which to actually invest? One simple option, and one that's arguably the best, too, is a broad-market index fund, such as the Vanguard Total Stock Market ETF (VTI 0.93%). It instantly gives you exposure to thousands of stocks representing most of the market, and it's the kind of investment that you just buy and hold, and add to, over many years.

It can be good, though, with kids, to add a few individual company stocks to the mix, to keep things more interesting. A solid, dividend-paying blue chip such as Waste Management (WM -1.22%) can be a smart choice, in part because it's relatively easy to understand. It's reliable because garbage collection is likely to be in great demand for a long time, and the company has become a major recycler, too, even generating energy from some waste. The stock's dividend recently yielded a solid 3.1%.

If you and your child really get into it, you might start discussing the merits of various companies together, and evaluating their business models. Get your child to appreciate that the best stocks often have compelling models, such as that of eBay (EBAY 1.32%). The online marketplace, unlike most retailers, has no brick-and-mortar locations to build and then maintain. Amazon.com has also grown explosively in the past decade without any storefronts, but it does have to build and maintain distribution centers across the country (and beyond), in order to offer fast deliveries. eBay makes lots of money simply by connecting buyers and sellers, and taking a cut of each transaction. Better still, it owns the highly lucrative PayPal business, which it's planning to spin off as a separate company. 

Kids are familiar with the smartphone industry.
Photo: Pabak Sarkar, Flickr

When seeking the best stocks for your child's portfolio, it's also good to focus on industries of interest to him or her, such as, perhaps, smartphones or organic foods. In those arenas, consider Apple (AAPL -0.35%) and Whole Foods Market (WFM). Apple will certainly be familiar to just about every child, and it's not extravagantly priced these days, either. (This would be a great time to explain that despite a seemingly high stock price above $100, it can still be a bargain, and that a stock's price alone doesn't tell us much.) The company just released a pair of new iPhone 6 phones, which it sold 10 million of in the first weekend. The company's last quarterly report was strong, with the average iPhone selling price rising to $603 and iPhones topping $100 billion per year in sales. Its new smartwatch is coming, and the company has a history of innovation. It even offers a solid 1.8% dividend yield, which is likely to grow.

Whole Foods Market, meanwhile, faces risks, like every other company -- among them the fact that other stores are starting to offer organic produce (even Wal-Mart!). Its growth rate has been slowing, too. Still, it has great growth potential, as its stores number only in the hundreds, not the thousands like many rivals. Whole Foods's profit margins tower over those of its rivals, too, even when they shrink a bit. The company is also starting to run commercials on TV, which is likely to boost sales. Whole Foods Market is not bargain priced right now, but it offers a good chance of solid long-term growth – and a 1.2% dividend yield, too.

Get your children into investing when they're young, and have them start investing in the best stocks they can find (or simple index funds), and they can make the most of the long lives ahead of them and end up much better off financially.