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I have been talking a lot here lately about teaching my 12 year old son about investing in dividend stocks. Over the summer he has taken on some odd jobs around the neighborhood earning money. At first he wanted to use his earnings to buy video games but I have recently convinced him to think about investing it.
He and I recently had a lesson on the power of dividend stocks and the importance of starting to invest early in life.
The following is a scenario that he and I went over about investing the $120 he recently earned.
Note – At the time of this writing, we have not invested any money yet. The following is more of a “what-if” scenario. Unfortunately, we are waiting for LOYAL3 or another zero cost broker like Robinhood to offer custodial accounts.
Investing $120 Using LOYAL3
My oldest son currently has $120 available to invest in dividend stocks. For the time being, let’s assume that LOYAL3 offered custodial accounts and he could pick and choose what stocks to buy from their offerings.
When I first discussed dividend stocks with my son, we actually went through several offered by LOYAL3. We narrowed our list of potential companies down to 3 – McDonald’s (MCD), Coca-Cola (KO), and Pepsi-Co (PEP).
While these may or may not be the best investment options at this time, I think it is important for him to understand how stocks work and the companies behind them. He knows McDonald’s, Coca-Cola, and Pepsi. These are products that are right in front of him everyday. That is what makes LOYAL3 very unique as a broker. They let their customers invest in companies (some that pay dividends) that they know.
Investing in McDonald’s (MCD)
After narrowing our list down to 3 companies, we began comparing factors like dividend yield and growth rates of the different stocks. We ultimately decided that McDonald’s (MCD) would be his best option based on the yield.
We came up with the following trade scenario so I could show him the power of investing in dividend growth stocks.
Here are a few of the financial stats for MCD at the time of this writing –
- Price per Share – $96.15
- Current Yield – 3.50%
- 5 Year Dividend Growth Rate – 9.90%
- Dividend Amount – $3.40
If we were to have invested his $120.00 at that point, he would have purchased approximately 1.25 shares of MCD.
Remember that LOYAL3 does not charge commissions on their trades so we can use the full investment amount to buy stock. In addition, the brokerage lets investors purchase partial shares of stock. This will allow us to purchase an additional .25 share of MCD – letting us stretch our money further.
Investment 5 to 10 Years from Now
Buying 1.25 shares of McDonald’s stock is not to exciting – even for a 12 year old. In order to raise the excitement a little, we needed to look at this investment several years out.
Here is a look at the amount of dividend income my son would earn for the next 10 years, assuming a 9.90% dividend growth rate.
- Year #1 – $4.20
- Year #2 – $4.62
- Year #3 – $5.07
- Year #4 – $5.57
- Year #5 – $6.13
- Year #6 – $6.73
- Year #7 – $7.40
- Year #8 – $8.13
- Year #9 – $8.94
- Year #10 – $9.82
Now first off, earning $9.82 over 10 years from now in dividend income may depress you a little. However, keep in mind that we are only investing $120. There are no reinvestment’s factored in. All of this potential income is from purchasing just over a share of stock and sitting on it.
You may also notice that between years 1 and 9, the dividend more than doubled. That is not a bad increase for doing absolutely nothing at all.
If somehow my son could earn – say $100 per month – doing jobs around the house and invest $1,200 just in the first year – the growth would be the same as investing only $120. However, instead of earning $9.82 in dividend income in year 10 – my son would earn $98.20. Still not going to make him rich but a good sum of money for doing nothing the previous 9 years.
Note – LOYAL3 will let you invest a minimum of $10, so technically we could reinvest in partial shares of MCD when our balance grows to that amount from dividends received.
The hope or plan I should say is to continue investing more capital each year. Maybe my son starts out investing $200 or $300 the first year. Then $400 or $500 the next. As he gets older and gets a part-time job, maybe it is a $1,000.
Just as long as he realizes the importance of investing early. By reviewing scenarios like these, he can begin to realize the power of compounding interest.
I wish I would have started investing when I was 12. The next best thing is to teach these skills to my son (and other 2 kids) so they can find their financial independence when they are my age.
Do your kids invest? How early did they start?