Why is promoting financial literacy important? Because one of the best gifts we can give the young people in our lives is the gift of financial independence – and it’s always best to start early as it sets a precedent. With children the key is repetition. Introducing kids to companies they can relate to and talk about throughout the year consistently reinforces the idea that they have a vested interest in this company.
Buying stocks for children is also a great opportunity to teach them about money on a practical level, sitting down with them at the end of the year and going over their own portfolio and noting the changes. They might not get it at first but as you repeat the scenario for 5, 7 or 10 years they will begin to understand.
At CAIM we believe there are 3 key elements to selecting stocks as investments for children.
1. Choose a company that has products your child can relate to. For example, Proctor and Gamble (PG) sells lots of every day household items from toothpaste to batteries.
2. The company should have a history of paying dividends. Dividends should be reinvested as they are paid to buy more shares over time. Many of the companies we recommend have a history of increasing their dividend exponentially allowing the investor to buy more shares. This compounding effect can have a tremendous impact on the total return of the investment over time.
3. Buy companies that are attractively priced based upon the company’s fundamentals. We favor companies with low levels of debt and high levels of cash flow. These companies are better poised to withstand market downturns and have the financial flexibility to grow their business and their dividends.
CAIM’s Holiday List:
1. Proctor and Gamble (PG, $62.13, 3.1% dividend yield). We like the diversity of products this company sells. It makes for great conversation with children when talking about all their products from household to health and beauty. This company pays a dividend yield above the 10 year treasury and has increased their dividend every year since 1971. It currently sells at a 20% discount to its 5 year price/earnings ratio and has $5.12 in cash flow per share.
2. United Technologies (UTX, $74.80, 2.3% dividend yield). With only 32% debt and $6.31 per share in cash flow, this industrial company has weathered the recession well. Sikorsky helicopters, Otis elevators and escalators are some well known products this company produces. We also like this company’s commitment to alternative energy options. This year they increased their dividend 10%.
3. International Business Machine (IBM, $142.89, 1.8% dividend yields). Most households have at least one if not more computers. This cash rich company increased their dividend 18% this year. They have increased their dividend every year for the past 10 years, at one of the worst periods in history for stocks. This company sells at a 10% discount to the S&P 500 and a 10% discount to its 5 year price to earnings ratio.
Many of these companies offer dividend reinvestment plans (otherwise known as DRIPs) to buy the share directly through the company. Charles Schwab and Company will open up a custodial account with as little as $100. Please call with any questions about how to set up a plan or how to choose companies that are right for your child.
Enjoy the holiday season!
Copyright 2010, CAIM LLC
Disclaimer: NO CONTENT PUBLISHED AS PART OF THE CAIM LLC NEWSLETTER CONSTITUTES A RECOMMENDATION THAT ANY PARTICULAR INVESTMENT, SECURITY, PORTFOLIO OF SECURITIES, TRANSACTION OR INVESTMENT STRATEGY IS SUITABLE FOR ANY SPECIFIC PERSON. TO THE EXTENT ANY OF THE CONTENT PUBLISHED AS PART OF THE BLOG MAY BE DEEMED TO BE INVESTMENT ADVICE, SUCH INFORMATION IS IMPERSONAL AND MAY NOT NECESSARILY MEET THE OBJECTIVES OR NEEDS OF ANY SPECIFIC INDIVIDUAL OR ACCOUNT, OR BE SUITABLE ADVICE FOR ANY PARTICULAR READER. EACH READER AGREES AND ACKNOWLEDGES THAT ANY SPECIFIC ADVICE OR INVESTMENT DISCUSSED IN THE BLOG MUST BE INDEPENDENTLY EVALUATED BY THE READER AND HIS OR HER ADVISER IN VIEW OF THE READER’S INVESTMENT NEEDS AND OBJECTIVES.