Start a Dividend Income Portfolio Using Custodial Accounts
Just the other day I asked the question – “At What Age Should You Start Investing?“. In my opinion, it should be as early as you possibly can.
Now I am not talking about investing without a plan, but rather buying solid dividend paying companies that will provide steady income for years.
I didn’t start investing any kind of money until I was 22 years old. And the type of investing that I was doing was not sustainable. At times I was acting more like a trader than really an investor.
It wasn’t until 7 years ago that I purchased my first dividend paying stock. Even after I purchased shares in this stock, it took 2 additional years to put together my plan to build the Money Sprout Index.
The Money Sprout Index is a collection of 25+ companies that continue to pay (and raise) their dividends each year. If I would have started building this index when I was 22 years old (some 20 years ago), my family would likely be financially independent as I sit here and write this today.
Not all is lost however. My wife and I have been steadily building our dividend portfolio for the past 5+ years one month at a time. For the first time ever, we will hit $1,000 in dividends and are on pace to blow past $2,000 in dividends the following year.
I have also started to pass the lessons learned from my past experience on to my children. The first plan of action is to help my oldest son (soon to be 12) set up a custodial account in which he can buy shares of stock from.
What is a Custodial Account?
A custodial account can serve a couple different purposes. It is a financial account that is setup for a beneficiary and is administered by a responsible person known as the custodian.
The custodial account that we are interested in is one that is set up for a minor. This is the type of account that we will be setting up for our son in order to begin building his dividend income portfolio.
According to Investopedia, a Custodial Account is an –
“account created at a bank, brokerage firm or mutual fund company that is managed by an adult for a minor that is under the age of 18 to 21”.
Brokerages that Offer Custodial Accounts
There are several different brokerages that offer custodial accounts for minors. One brokerage that my wife and I use is Fidelity, which offers custodial account setup.
According to Fidelity, they define these custodial accounts as follows:
“Invest on behalf of a minor with a custodial account (also known as an UGMA or UTMA account, based on the Uniform Gifts/Transfers to Minors Acts). A custodial account at Fidelity is a brokerage account with comprehensive trading, mutual fund, and cash management features. Funds in a custodial account are irrevocable gifts and may only be used for the benefit of the minor.”
A few of the Custodial Account features through Fidelity include:
- No annual account fees and no trading fees for most Fidelity mutual funds.
- Online stock commissions on U.S. equity purchases are $7.95 per trade.
- $2,500 minimum investment required.
- Online access to the account.
- Offerings includes stocks, bonds, options, ETF’s, and over 5,000 mutual funds.
Unfortunately, Fidelity is not a good option at this point to setup a custodial account for our son. To date, he only has $120 to invest. Fidelity requires a minimum of $2,500 to open an account.
In addition, I want to avoid paying a ton of trading fees to buy stock. In order to buy shares of stock through a custodial account at Fidelity, it costs $7.95 per trade. That is over 6% on a $120 investment.
Other Brokerage Options
Two of my favorite new brokers are LOYAL3 and Robinhood. Both offer commission free trades and are great tools for dividend income investors to use to save on costs and fees.
Unfortunately, at this time both brokerages do not offer custodian accounts. However, both have stated that they plan to offer these features soon.
While I am not sure on possible account features that either will offer, we plan to wait until these brokerages offer these accounts.
Even if my son had the $2,500 minimum to setup through Fidelity, I am not willing to pay $7.95 a trade for him to buy stock.
The thought of setting up a custodian account for my son to begin investing in dividend paying stocks seems like a good idea. If he can start building his dividend income portfolio at age 12, just think of where he can be when he is 20 to 30 years older?
The only issue for now is the large minimum fee to setup an account through a traditional broker like Fidelity.
If any of the new commission fee brokers like LOYAL3 or Robinhood decide to offer custodian accounts, then we will likely get him started investing in his future. Otherwise, we will stick with putting his money into a savings account until he gets older.
Have you ever setup a custodian account for a child? What advice can you offer?