Sunday , 19 May 2024

Teach Your Children About the Benefits Of Dividend Stocks – Here’s Why (+2K Views)

This article discusses the value in parents teaching their children about dividend investing at an early age.

Investors looking for build wealth over time, while reducing the risks of investing in the stock market, should consider dividend stocks.

  • In particular, investors should focus on stocks that not only pay dividends, but also raise their dividends each year. This is the sign of a profitable business model, with sustainable competitive advantages, and powerful brands.
  • In fact, according to Standard & Poor’s, dividends have accounted for one-third of stock market returns since 1926.

For investors interested in dividend growth stocks, there is no better place to look than the Dividend Aristocrats.

If the Dividend Aristocrats don’t pique your interest, there is an even more vaunted club of dividend growth stocks, the Dividend Kings.

Fear Of Missing Out

Research has proven that dividend growth stocks have significantly outperformed stocks that don’t pay dividends and the total return of the Dividend Aristocrats has outperformed the S&P 500 Index total return over the last decade. The Dividend Aristocrats Index returned 10% per year over this time period while the broader S&P 500 Index returned 7.2% over the same time period.

SPY Performance

Source: Standard & Poor’s

Studies also show that many Americans are woefully under-invested. A Gallup poll from April 2016 found that only 52% of Americans owned stocks, matching a record low over the past 19 years. Almost half of Americans do not own stocks. As a result, despite the S&P 500 Index soaring to record highs in the years after the 2008 recession, an alarming number of Americans have not benefited at all. This has only exacerbated the large—and growing—wealth gap in America…

Many adults are extremely hesitant to invest in the stock market, often viewing it as a casino, one in which the game is rigged against the little guy, but this simply stems from misunderstanding. The stock market has historically been the greatest wealth-building tool at Americans’ disposal.

One of the reasons why many adults are unfamiliar with investing, is that they were not told about investing as a child. Discussing money matters with family can seem taboo to some. The easy way to rectify this, and prepare your child for a lifetime of profitable investing, is to introduce it to them when they are young.

Investing does not have to be just for those who are already wealthy. In fact, everyone should invest, because dividend stocks are one of the most effective ways to become wealthy over time. That last part—time—is a critical component to building wealth. It is often said that the most important part of investing is time in the market, not timing the market. In other words, investing regularly and consistently over long periods of time is a much better way to build wealth, than trying to trade in and out of the market…

The Magic of Compounding Interest

Compounding interest refers to the phenomenon of interest earning interest. To demonstrate

  • [let’s] assume an investor earns 5% interest, compounded annually, on an initial investment of $100.
  • In the first year, the investment would generate $5 of interest. If the interest is reinvested back into the original investment, it would begin to earn interest the next year.
  • As a result, total interest earned in the second year would be $5.25, as the $5 of interest from the first year, earned 5% interest of its own.

While it might seem like a trivial difference, over long periods of time, compounding interest has a snowball effect. This speaks to why it is so important for parents to teach their children about investing—the earlier a person gets started, the more they will earn over time and a few years of additional investment time can have a profound difference.

  • According to Standard & Poor’s, the Dividend Aristocrats have returned 10% per year, over the past 10 years.
  • At a 10% annualized rate of return, investors would see their money double in a little over seven years.
  • An investor who socks away $50,000 and earns a 10% annual return, would have nearly $130,000 in 10 years. but person who invests that same $50,000 over 20 years, would end up with $336,000.

This demonstrates the power of compounding—the second example is invested for twice as long, but generates nearly three times the total return.

The results are even more impressive when investing additional funds periodically. For example,

  • consider [that] an investor again starts with $50,000, and invests for 20 years
  • but this time the investor manages to invest an additional $10,000 per year over those two decades, and earns the same 10% annual return. In this case, the investor would have just over $909,000 after 20 years.

Buy Dividend Stocks, The Earlier The Better

The biggest advantage young investors have is time. Investors who get started early do not have to save nearly as much as those who get a delayed start.

The benefit of having all those years in the market is profound.

  • If two parents set up a $10,000 investment account when their child is born, and the account earns 10% per year, the account would be worth approximately $55,000 in 18 years.
  • If those same parents can add $1,000 per year to the account, their child would have $101,000 by the time the child is ready to go to college.

Given the soaring cost of tuition and other college expenses, investing in dividend stocks could help pay for college on its own…

Final Thoughts

Parents teach their children many things…[yet] finances are often not a part of family meetings. This should change because finances are one of the most important parts of a person’s life.

Investing in high-quality dividend stocks can help secure your child’s financial future. As a result, don’t be afraid to make investing a family affair…

The above comments are edited [ ] and abridged (…) excerpts from an article by Bob Ciura

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