Dividend Reinvestment Plans (DRIPs) are a great way to accumulate shares of stable, dividend-paying investments for the long term. With a DRIP, an investor purchases shares of stock directly from the company, eliminating many of the fees associated with brokerage accounts and advisers.
Teaching children about investing is a challenge, and it is wise to start small to keep kids focused and relate to what they know. DRIPs are a great way to begin the conversation and are the perfect avenue to teach this lesson.
DRIPs typically require relatively low initial investments, which are made either directly with the company or its agent. This low barrier to entry is good for children and parents, as saving several weeks of allowance money might be enough to make the initial investment.
Subsequent optional cash investments are set up for automatic bank account withdrawal at predetermined intervals. For example, you may choose to add $50 per quarter, thereby dollar-cost averaging into shares and accumulating whether the price is up or down. Kids will learn what it is like to buy low and high.
Dividends are reinvested in the company directly and accumulate more shares. This rewards loyalty to the investment and gives a lesson in the power of compounding money over time. Dividends are like a child’s allowance and could even be substituted for an allowance if the parent helped with the initial investment.
There are several well-known companies that provide DRIP options with minimal start-up fees and good dividends.
Invest in what kids know
Shampoo, dog food, toothpaste, batteries: these are just some of the items from around the house sold by The Procter & Gamble Company (NYSE:PG) . The Procter & Gamble Company (NYSE:PG) produces some of the best-known brands in the world, and many that kids will instantly recognize.
With a $250 initial investment and $50 optional cash reinvestment, the price is low to acquire The Procter & Gamble Company (NYSE:PG) shares through its DRIP. With a stable 3.1% dividend, shares have an additional avenue to accumulate value over time.
Few brands have the longevity of The Procter & Gamble Company (NYSE:PG). The company is 176 years old, and will likely remain viable for many more generations. Even at that age, The Procter & Gamble Company (NYSE:PG) continues to project an impressive growth rate of nearly 8% over the next five years.
Owning part of Cinderella’s castle
For the same initial $250 and $50 optional cash investment, kids can own a part of Cinderella’s castle. With a small 1.1% dividend yield, young shareholders won’t likely save enough for a trip to one of The Walt Disney Company (NYSE:DIS)’s theme parks, but might be able to enjoy a kid’s meal at Goofy’s Kitchen.
The Walt Disney Company (NYSE:DIS) stock looks like a good bet over the long-term. At 17 times earnings, shares are not too expensive, and the company has good growth prospects in the future. Kids will recognize Disney mainly for theme parks and the Disney Channel, but the real profitability lies in other broadcast networks, including ESPN and ABC. These segments are projected to continue growing, driving a projected 12% EPS growth over the next five years. In that amount of time, Junior’s The Walt Disney Company (NYSE:DIS) DRIP might just have enough cash for a trip to Orlando after all.