5 Stocks to Teach your Kids to Save and Invest

By Erik Eason - September 7, 2012 | Tickers: ATVI, DWA, HAS, SBUX, DIS | 0 Comments

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Kids are a lot more receptive and capable than we give them credit. They just need to relate personally to a subject to get them fired up and engaged. With that spark ignited, they begin learning like a sponge and begin taking responsibility for the outcome. What better way to get them financially independent and self-reliant in their adulthood than to teach them about how to make their hard earned money work for them? With that insight they will become net savers, savvy investors, and able to embrace life's opportunities and navigate its rainy days.

Start ‘Em Young!

How young can you begin teaching your kids about investing? Jason Moser, a Motley Fool portfolio analyst, began last year teaching his 7 year old and 5 year old daughters. Simply by commenting that they are part owners of the Panera Bread they were walking into, he got their keen attention and excitement. Can you imagine the thrill they must feel that they are actually part owners of stores their family frequents? They now invest their own allowance money, so they have skin in the game. With their own money invested, this otherwise intangible activity becomes real to a child, and they pay close attention; they have a piece of the action they can call their own.

A further reason for having them invest real money is the spectacular returns those childhood investments will blossom into over their lifetimes. The math isn't merely compelling, it's astounding. Let me give you a couple of examples.

The Rewards are Spectacular

Let's say your 15 year old son has just begun his high school freshman year. Between an allowance, summer jobs, maybe a part-time job during school or odd jobs in the neighborhood, he manages to bring in a couple of hundred bucks a month on average. Now say instead of blowing all of it on the latest techno gadgets, he invests half of it, $100 per month, in the stock market for all four years of high school.

If he chooses conservatively, his stock choices may yield 2% annual dividends and grow a modest 7% average per year. He gets to watch the stock price zig and zag, yet slowly trend up (thus teaching him to hold on and not sweat the variability); and he gets to see money appear each quarter - dividends he reinvests along with his new money. He discovers that instead of him always working for other companies; his companies can work for him.

By graduation his brokerage account will be worth roughly $5,700. Even if he never adds another penny, by age 55 these four years of investment (with a $4800 basis) are now worth $140,000. That's a whopping 2800% gain, as illustrated with the blue bars in the chart below.

Time Matters Most of All

Now let's say you begin teaching your 6 year old daughter at the outset of 1st grade. Sure, there's no way she can afford $100 per month; but you offer her an allowance sufficient that she can begin investing $10 per month. At the beginning of middle school, 6th grade, she ups it to $25 per month; and her freshman year she again ups it to $100 per month to match her older brother.

By her graduation from high school, her brokerage account will be worth about $9,000. If she never adds again, by age 55 these 12 years of investment (with a $6,600 basis) are now worth nearly $220,000 for a 3200% gain, as illustrated with the pink bars in the chart below.

These impressive numbers illustrate the power of compounding returns over a lifetime. Modest sums invested while in secondary school can grow into a fine retirement nest egg. Now just imagine what your kids will be financially worth if they continue saving and investing during the next 30 years of their working career. It doesn't take much to hit a million dollars at retirement. A pretty nice gift you gave your kids, yes? That and a lifetime of self-confidence and self-reliance: the best gifts of all.

Good Companies to Spark Their Interest

But where to get them started? You don't want them investing in hot-stocks or fiercely volatile companies that could toss their money and their belief in stocks down the tubes. The best companies to introduce your kids to are ones they know and personally connect with; yet which have been around for a very long time and will continue quietly chugging ahead without alot of fanfare. As your children build out their portfolios I would see to it they include some dividend stocks so they can directly see one of the rewards of stock ownership: money "magically" appearing!

Toy companies will be a big hit with younger kids, and there are some great film companies for both young kids and teenagers. Top of this list is Disney (NYSE: DIS). What's not to love about Mickey Mouse? The company is growing exceptionally well as it successfully cross leverages its many properties, from animation characters to Disney World. This is particularly visible with its admirable job of integrating its acquisitions of top flight companies. It has brought Pixar and Marvel into the fold without stifling their originality while giving them greater cross-product sales through Disney’s vast marketing machine.

Right behind it I would list Hasbro (NASDAQ: HAS) and Dreamworks (NASDAQ: DWA). Hasbro is a nearly century old company that just keeps on quietly acquiring and successfully promoting its franchises including such icons as Transformers, G.I. Joe, Magic the Gathering, and best of all, Mr Potato Head! It has recently entered into kid-focused film production with Transformers and G.I. Joe as headliners.

Dreamworks has a list of blockbusters to envy: Shrek, Kung Fu Panda, Madagascar, the list goes on. To increase their reach, they are experimenting with what works overseas which turns out to be quite different from what works in America. Come the day they solve the cultural riddle they will do very well indeed.

For teenage boys, Activision Blizzard (NASDAQ: ATVI) is a must: World of Warcraft, Call of Duty, Diablo, Starcraft, Skylanders, and a still-secret one in the works. While the stock price has languished for the past four years with the overhang of Vivendi's large ownership block, the company has emerged as the best computer game company in history. Best in quality, best in financial results. Once the stock logjam is solved, the price will only go up; and it offers a dividend while you wait.

The best choices, however, may be those cafes and retail shops that you and your kids go to; or as they get older, the ones they go to. A good ubiquitous choice that will undoubtedly be around for a long time is Starbucks (NASDAQ: SBUX). In the past few years it has righted its ship in America, pruning its store count while opening new cafe concepts such as Evolution Fresh, and is rapidly expanding the aromatic coffee sensation into China.  

These companies all have great leadership, great brands and products, and every likelihood of prospering for years to come; but most importantly, your kids can personally connect with them, or with others like them. What better way to teach your kids the value of money, the value of saving and investing, and a sense of responsible control over their own futures than to let them participate hands-on with their own money?

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