Stocks for Kids: Gifts That Last a Lifetime

02/19/2016 10:00 am EST

Focus: STOCKS

Jimmy Mengel

Editor, Outsider Club

Stocks, notes Jimmy Mengel, could be the best gift you can give a child or grandchild. Here, the editor of The Crow's Nest explains how your generosity today—and the benefits of time, compounding, and dividend reinvesting—can put a child on the right path to wealth. He also highlights some fun investment ideas that are well suited for gift giving.

Steven Halpern:  Our special guest today is Jimmy Mengel, Editor of the Crow's Nest. How are you doing today, Jimmy?

Jimmy Mengel:  Doing great, Steve. How are you doing?

Steven Halpern:  Very good. Thanks for taking the time. I never use the phrase life changing when talking about an investment idea, but your latest report truly fits that description. You suggested that adults—such as parents and grandparents—consider giving stocks as gifts to children rather than the standard toys.  Could you expand on this idea?

Jimmy Mengel:  Yes, absolutely. It all kind of hit home for me when I had my son’s third birthday party. We had this big party, you know, like friends, parents, uncles, aunts, like everybody was there.

It was a big shindig, but along with that came a slew of gifts, you know; toys, remote control cars, clothes, all of these things…and these, I mean, very kind gifts, but there was just so much stuff that honestly my son couldn’t have possibly even used them all, and eventually, we’ll probably send most of it to Goodwill in the coming months.  

I’m not knocking on birthday presents, obviously. It’s fun to shower our kids with gifts and you see that joy on their face, and birthday parties are great, and I don’t think that you should not give kids gifts, but most of the toys and items are not only expensive, but they’re really quite fleeting and kids will grow out of these faster than we’d like to admit.  

Pretty much what I’m saying is an investment in stock when kids are that young, is probably the best gift you can ever give them for their future, so while they won’t remember maybe that toy truck or the stuffed animal, they’ll certainly remember your forward thinking gift of the stock when, say, they turn 16 and have several thousand dollars to spend on that first car.

Or if they’re even more forward thinking, like a pretty serious down payment on that first house, and say they’re really smart, they hold on to it forever and use that to like supercharge their retirement savings, so you really give them a great foot forward by thinking about something like stock as a gift.

Steven Halpern:  Now to enhance the benefits of a stock gift to a child, you suggest using dividend reinvestment plans. Can you explain what these are and how they could help in terms of building a long-term portfolio?

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Jimmy Mengel:  Yes, absolutely. I think dividend reinvestment programs are pretty much one of the best ways you can kind of set and forget a portfolio, because say you’re giving a gift to a child.  Obviously a four-year-old is not going to manage his stock portfolio and jump in and out of the market, I guess it’s not going to happen.  

That would be great, but…and likewise, if you’re giving a gift, I don’t think you want to necessarily be responsible for managing like a portfolio for a child.  Everyone has their own stuff to deal with, so I think a DRIP is a great place to start.  

For those that are not completely sure about what a dividend reinvest program is, it basically allows you to buy the stock through the company directly, often times without paying any broker fees, so it’s kind of like a roundabout way to invest in a company without racking up a bunch of fees, and again, allowing you to set it and forget it.  

Basically, once you enroll in a dividend reinvestment plan, all of the dividends paid out by the company automatically get rolled back into buying more shares of that company.

It’s a pretty simple idea, so your interest payments buy more shares for you and that raises your stake in the company, and then, those interest payments continue to grow as you accumulate more and more shares.

The snowball effect is pretty much one of the most powerful investment tools in the world.  In fact, Albert Einstein himself called compound interest the eighth wonder of the world.

Steven Halpern:  How difficult is it to establish a DRIP in a child’s name?

Jimmy Mengel: It’s actually pretty simple. There’s a couple of different ways to do it. What I did is, basically, I set the plan up in my name and when my son is old enough, I’ll simply transfer the shares over to him and then he can take over from there.  

At this point I don’t want him touching that stuff until I’d say until he’s a teenager but maybe even beyond that. You don’t want them cashing out and buying a bunch of crap when he’s a teenager.  You really want to set this up for him as a long-term solution.

Basically, if you want to enroll your child into a DRIP, what you can also do if you want to actually put it in their name is, you can transfer; say you have your own shares in a company, you can transfer those to your child’s name or your grandchild and then you just act as the adult custodian of the account.  

That avoids kind of the nonsense of them being a kid and trying to deal with these accounts. Once the kid comes of age, all you do is remove your name from the account and pretty much hand over the reins.

Steven Halpern:  Now, as you mentioned in the Einstein reference to the value in compounding, and as you point out, it’s not unrealistic to help set a child on a path to one day retiring as a millionaire.  Could you walk us through an example of the power of time on building wealth?

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Jimmy Mengel:  Yes, absolutely and it’s one of the things that, being an adult myself, I really, really wish I would have done it as a little kid. It’s amazing how much time factors into this compounding of interest. Let’s say you have the crazy idea you want to turn your child into a millionaire by the time they retire.  

Let’s start with the millionaire example and say you invest $4,000 around the time a child or grandchild is born and you just let that ride, meaning you don’t even contribute anything else throughout the course of that account.  

You put down your $4000 and let it keep building.  By the time that the child turns 65, that $4000 will compound to around $1 million if you’re assuming maybe a 9% return every year, which, if you look at most long-term blue chip stock positions, is completely reasonable.  

Steven Halpern:  Now, you suggested that parents or grandparents can combine the fun of gift giving with this lesson in the value of investing, and you’ve come up with a couple of examples of stocks that would be ideally suited to this type of program.  Could you share a few examples?

Jimmy Mengel:  Yes, definitely.  Kind of the issue with giving stocks to a kid is they’re going to look at you like you have four heads and say, “What is this? You gave me a piece of paper for my birthday” and start weeping, like “What’s wrong with you, dad?”  

The way I like to frame it with kids is you make them feel like it’s part of like a larger package, so there’s a lot of examples I could use, but I’ll narrow it to three quick ones.  

Disney (DIS) is an obvious place to start. Kids of any age are very familiar with Disney, as I can attest to as I’ve seen Frozen more times than I care to admit, but if you look at the track record, it’s been a solid blue chip for ages now.  

The stock itself is up about 323% over the past 20 years. You take it back 30 years and you’re looking at a return of 2773% so that’s obviously a no-brainer investment.  If you add the dividends in that and you start compounding them, that becomes not only a wonderful investment but a life changing investment.  

While it yields 1.5% dividends right now, you have to think about this on the timeline, so if you have that time, you start them young, this is something that could really revolutionize the rest of their life.  

What I did, instead of just giving him a piece of paper and having him cry, I gave my son a Captain America action figure, because he’s way into super heroes right now, and you know, Disney owns Marvel comics, so they’re pumping out these movies.  

He was thrilled with the action figure and I explained that the special paper that I gave him with the action figure means that he actually owns part of the company that makes all of his favorite movies.

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It’s basically like this certificate means you’re a part of the super hero team now, and he was, well, of course, he was way more into the action figure, but he was very curious and happy to know that he had this special paper to hang on his wall, that he was kind of part of a larger thing.  

I think that’s just an interesting way to break the ice a little bit and get them at least attuned to the idea that there’s just this larger world out there that—even as a little kid—they are now a part of.

Steven Halpern:  You’ve also suggested a similar approach with Hershey (HSY).

Jimmy Mengel:  Oh yes, Hershey chocolate.  Again, it’s been a solid company for a long time and it’s one of those things that’s just easy to relate to kids, so you give them a Hershey certificate along with a bag of Hershey Kisses or something, and you know, kind of key them into the fact that, “hey, now you’re a part of this program.”

I think Hasbro (HAS) is another easy example.  You know Hasbro, they’re a huge toymaker.  They do all the Playskool stuff like that iconic red and yellow plastic car which my kids have, Mr. Potato Head, you know, all of these things that you can relate to a kid, that somebody makes these things and now you are part of this company, you’re part of the team.  

What’s good about Hasbro, for example, is while a lot of those toys they make for very little kids, if you have a one or two-year-old, they’re not going to understand any of this, so I’m thinking of more just like, alright, if you do Hasbro, you have something like Monopoly board game, or if the kid is a little older, like Magic the Gathering, who they also own.  

You can package that kind of stock certificate in with something that, you know, they’re interested in and kind of make it that package deal. Hasbro is pretty cool compared to Disney because where Disney yields about 1.5%, Hasbro’s dividend is about 2.5%.

So you’ve got to be thinking about the dividend yields when you’re looking at a long-term dividend reinvestment program and I think Hasbro is a pretty good place to park some money and teach your kids the value of investing.  

Steven Halpern:  Now, we’re out of time, but I’m just curious whether or not you consider Mattel (MAT) in the same category?

Jimmy Mengel:  Oh, absolutely. I would say it’s interchangeable with Hasbro.  I think the key is looking at the long-term blue chip and realizing they’re going to be around for a while.  You’re not going to want to jump on a bad stock.  

You’re much better served connecting with your child, the product, and the philosophy of the company versus jumping in and out of maybe some more fleeting investments.

You and I both know, kids go through a ton of different trends, so you’ve got to think of the long-term dividend history and if you can find yourself, say, a dividend aristocrat who has a very, very long track record of raising the dividend, those would be my recommendations for starting a DRIP for a child.

Steven Halpern:  Again, our guest is Jimmy Mengel of The Crow’s Nest. Thank you so much for your time today.

Jimmy Mengel:  Thanks, Steven. I appreciate it.

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