The amazing power of compounding makes it easier to grow wealth the earlier in life you start investing. So, perhaps you want to help give your grandkids the financial leg up in life that you wish someone had given you, by buying stocks for them.
We asked three of our contributors to name a stock that he or she believes would make a great investment for a child. Find out below why American Water Works (NYSE:AWK), Synaptics (NASDAQ:SYNA), and NextEra Energy (NYSE:NEE) could be tickets to your grandkids' financial head start in life.
American Water Works, the largest investor-owned water and wastewater utility in the United States, would make a great stock to buy for a child if your goals are:
- Buying an "autopilot"-type stock
- Generating superior long-term gains
- Igniting an interest in investing
American Water Works is not a stock you or your grandchild will have to closely monitor. While many things will change in the decades to come, it's a certainty that your grandkid will grow up in a world where water remains the most essential commodity on the planet.
You'll be hard-pressed to find a stock that offers this type of stability while generating superior long-term gains. Since its April 2008 IPO, American Water Works stock has returned (including dividends) 320% through March 29, crushing the S&P 500's return of 77%. Moreover, this so-called "stodgy" utility also beat the returns of many stocks commonly recommended for kids, such as Walt Disney (245%), McDonald's (173%), Mattel (144%), and Coca-Cola (96%) over this period. There are some potentially attractive stocks among this bunch (I'm partial to Disney), but none of them sell a product guaranteed to be in demand -- or even in existence -- decades from now.
American Water Works has solid future growth potential, which should lead to continued market-beating long-term returns. It's the 800-pound gorilla in a very fragmented industry, which provides it with the resources to continue to grow through acquisitions. Moreover, it has pricing power in its nonregulated business.
Choosing a stock your grandchild can relate to should go a long way in sparking his or her interest in investing. All kids can highly relate to a water company -- just turn on your tap and tell your grandchild that whenever one of an estimated 15 million people in more than 45 states and parts of Canada does the same, his or her company makes money.
A great stock to take advantage of your grandkids' long time horizon for investing, and to get in on the Internet of Things (IoT) -- a multitrillion-dollar market opportunity -- is Synaptics.
Synaptics develops displays, touchscreens, and fingerprint security solutions primarily for mobile devices. Of last quarter's record $471 million in revenue, approximately 87% was mobile-related, and the balance was from Synaptics' PC-related products. Now, Synaptics is ready to grow its mobility business via one of the fastest-growing areas of IoT: connected cars.
How big is in-car technology? According to a recent study, new car buyers are more interested in an automobile's infotainment system than actual driving performance. Synaptics boasts a suite of solutions to win the connected-car wars, and it has already inked deals with some of the world's largest auto parts manufacturers. Better still, despite Synaptics' early wins, it's only scratched the surface of a market that will become as commonplace as a radio by the time today's grandkids become adults.
Synaptics was recently the recipient of a rumored $110 buyout offer earlier this year, its second in four months. The inquiry was notable because Synaptics was trading at just $62.05 a share at the time. It may fly under many investors' radars, but pundits certainly recognize the potential Synaptics offers.
Synaptics is an absolute bargain, too. Trading at just 10 times future earnings compared to its current 23, the Street clearly expects Synaptics' impressive revenue growth to continue. The grandkids of today already live in an IoT world, and Synaptics gives them an opportunity to grow their portfolios right along with the next trillion-dollar market.
If you're looking for a "set it and forget it"-type stock for your grandchildren, my suggestion would be to consider utility giant NextEra Energy.
NextEra Energy supplies power to more than 4.8 million residents in Florida and is best known for its subsidiary Florida Power & Light Company, or FPL. What makes FPL unique is that it's one of the largest rate-regulated utilities in the country. While rate regulation might give shareholders the desire to pull their hair out from time to time since rate hikes require permission from regulators, it also means less exposure to wholesale electricity cost fluctuations, and very predictable cash flow.
More important, NextEra Energy is the United States' utility kingpin when it comes to alternative energy investments. Although investing in wind and solar isn't cheap -- through 2014, NextEra had shelled out $20 billion to develop its wind business -- the long-term rewards could be huge. As the U.S. government begins pushing cleaner emissions standards on electric utilities, NextEra looks primed to be in great shape, with 32 million megawatt-hours of wind generation and approximately 700 MW of solar-power generation in 2014. Both figures are tops in the country for electric utilities. As the cost to provide alternative energy drops, it means NextEra could have a clear cost advantage over its peers. As a bonus, it also means FPL's customers could see smaller price hikes since FPL's costs remain under control.
Despite its heavy investment in alternative energy, the company is also paying out a market-topping 3% yield. With EPS growth looking to remain steady in the 4%-7% range for the foreseeable future, and NextEra selling a basic-need product (electricity), investing in this stock could be a smart way to give your grandkids' savings accounts a jolt.