Giving young children U.S. savings bonds for Christmas is as American a tradition as apple pie. Instead of a loud battery-operated device or video games, kids get an investment in the country and learn a thing or two about finance. Yet because of the low returns these bonds pay – especially these days – they teach kids more about saving than investing.
Instead, consider teaching your kids or grandkids more about investing by giving shares of stock – or just a single share. Giving kids the right equities shows them investing can indeed be lucrative and teaches a lesson on the connection between saving and investing when they're encouraged to re-invest their returns, growing their holdings in a company and then branching out to invest in others.
My own family history makes me somewhat biased toward giving stocks versus savings bonds. In 1992, both my grandmother and my mother passed away. As we were cleaning out their safe deposit box at the bank, we found two $25 war bonds from the early 1940s that had long been forgotten. The bonds had stopped paying interest years before and had been earning nothing. Granted, the purpose of my grandmother's buying them was to support the war, not to get rich – but, an article I read recently got me thinking. The article stated that if you had purchased one share of Coca-Cola in 1919 for $40 (no small sum then) and reinvested all dividends, it would be worth nearly $10 million today.
Granted, few of us can be so lucky to have ancestors with this kind of investment capital, market savvy or discipline. Not to mention that my grandmother was only 12 years old in 1919. Anyway, it got me thinking about giving stocks versus savings bonds – and, to the frustrating experience I had trying to cash in the bonds. Since both beneficiaries had passed, I had to go through a maze of government forms, along with the expense of ordering additional death certificates and then mailing paperwork to every potential living beneficiary. After paying expenses and wading through plenty of government red tape, my windfall from the two bonds totaled about $100 – not much of a return for roughly 50 years.
Yet this illustration nonetheless shows how, on a much smaller scale, giving kids blue-chip stocks that pay dividends can be not only an educational exercise, but also a wealth-building experience over time as well.
Indeed the benefits of owning dividend stocks are unknown to many adult investors but part of a classic strategy used by many successful professional investors. Many retirees like to own them for the income stream they provide through dividends. Younger people who don't need dividends to buy groceries don't miss this money – and can't spend it -- because they never get their hands on it. Even a single share of stock can be enrolled in most Dividend Reinvestment Plans (DRIP)
, through which investors can elect to automatically reinvest dividends in new shares or fractional shares, thus building their accounts over time.
Moreover, giving kids shares of stock opens the gate for them to buy more. That's what happened with my son. We started years ago with a single share as a stocking stuffer one Christmas. Later, as he got older and became more interested, we opened a brokerage account for him to buy more shares with his own money.