When you hold a stock for a long period of time, you benefit from the stock’s long-term trend. Adults who buy stocks for kids are giving the children the opportunity to hold the shares for decades, thereby extracting the long-term value of the company’s earnings. By avoiding fees, all the invested money is put to work growing the value of the child’s portfolio. Dividend reinvestment plans (DRIPs) and direct stock purchase plans (DSPPs) provide the means to purchase shares with little or no fees. Automatic dividend reinvestment helps little nest eggs grow quicker.
Ensure the child has a Social Security number. Income under $1,900 can be taxed at the child’s rate, but the child will need a SSN.
Identify stocks available through no-fee plans. Websites like Computershare.com list such companies and offer links to the plans.
Purchase initial shares. Many DRIPs allow new shareholders to make their initial purchases through the plans. In other cases, you will need to use a separate DSPP first. Be sure -- for tax purposes -- to make the purchase in the child’s name.
Direct the plan to reinvest dividends automatically. This will compound the value of the dividends received. If you purchased your original shares through a DSPP, you may have to open a DRIP separately.
Make regular additional investments of equal size. This way of accumulating shares is called dollar cost averaging, and it helps to lower your total average cost per share since you buy more shares when prices are low and fewer shares when prices are high.
- Building Wealth With $50: The 50 Best Dividend Stocks to Buy Without a Broker; Mkemo London
- All About DRIPs and DSPs; George C. Fisher
- Be a Dividend Millionaire: A Proven, Low-Risk Approach That Will Generate Income for the Long Term; Paul Rubillo
- The first $1,900 of income can be taxed at the child’s rate, which is usually lower than that of an adult. If parents would rather have the child’s earnings lumped with theirs, they must observe the $9,500 cap, above which the child must file a separate tax return. Many DRIPs provide automatic debiting of checking or savings accounts to facilitate a regular purchase schedule.
- Some transfer agents charge a small fee on shares purchased through direct plans. You can specify non-fee plans when you search for candidate stocks on Computershare. Remember to keep accurate records of all purchases and dividends to facilitate easier tax filings.
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.