About 2 weeks ago, I sent an email through my newsletter asking readers about what they would like to read about on The Dividend Guy Blog. One reader asked me how to teach dividends to his 16 year old. I thought it was an amazing topic. As a young dad for 2 great kids (William 5 and Amy 3), I understand the importance of being a role model and showing your kids as many smart things you can. One of them is definitely teaching your kids about dividend investing!
I was about to write a single article about dividend investing and teaching your kids about it but I thought of doing a small series instead. Today, I am starting with the basics: paying your children’s tuition fees with dividend investing. You don’t get the link between financing your kids’s college and teaching them about investing? Well I think the best way to teach is through leading by example. This is why if you are starting early to invest for your children, you can show them the results when they are teenagers.
A Dividend Portfolio to Pay Tuition Fees
I think that dividend investing is probably one of the best ways to build a solid portfolio over time that will help pay for tuition fees when you children are about to go to College. If you start when they are young, will have about 15 to 20 years to build your investments. This is a perfect time horizon for a dividend investor as the dividend growth and dividend reinvesting will play a big role in the growth of your capital.
By adding money to the fund each year, you will be able to buy new stocks on a regular basis. I personally plan to start my RESP (Registered Education Saving Plan) next year. The RESP is a Canadian Government sponsored program helping parents to finance their kids tuition fees. I know there is a similar program in the US but I don’t want to get into the details of something I don’t know in detail. As for the RESP, there is a 20% grant from the federal Government based on the amount of the parent contribution. On top of that, the capital growth is tax free (so you don’t have to worry about dividend taxable income each year) and the withdrawals (only the grants & profits) will be taxed in the hands of your child (who won’t be making much money and not paying much tax at that time).
As I have mentioned, I plan to start next year and I guess that my RESP plan will last at least 15 years (William will be 6 starting next year). If I put $2,000 per year in a dividend portfolio averaging a 4% dividend payout (and not counting capital growth), with the grants ($400 per year), I will have 48K when William will be 21.
One way I intend to teach him about dividend investing is to show him the dividend portfolio for his tuition fees starting at the age of 15. Then he will be able to see the progression with significant numbers. I doubt he would be impressed to see a 4% dividend payout on $1,000. However, a 4% payout on 30k ($1,200) is easier to appreciate in my opinion ;-).
I like dividend investing for an RESP for 2 main reasons:
a) It gives a steady payout (which can cover the tuition fees at first without taking money from the capital invested)
b) It is more stable than growth oriented investing solutions. Therefore, it’s much easier to establish a withdrawal strategy once your children are in college.
If You Are Looking For More Info on RESPs…
One of my blogging Friend, Mike Holman (from Money Smarts Blog) wrote the most complete and easy-to-understand RESP book I’ve come across. This is a complete guide to understand everything about this amazing program. Mike is a guy that likes going into the details and he made no exception with his book. If you have any questions about the RESP, you will find the answer in it! You can buy THE RESP BOOK at Amazon.
Other than the fact you’re a dividend guy, why start with dividend stocks initially instead of something simple/low cost like TD eFunds? Couldn’t you move the RESP money into dividend stocks in 10 years time to gain the dividend benefit?
The Passive Income Earner
I don’t think you have to wait until later to get your kids interested in seeing money at work. My daughter waits every month to see the pennies she gets for free in her bank account from the interest. I say get them hook earlier!
I like the angle on the RESP and dividends for education. Although I am investing in a dividend mutual fund for RESP, I had not though of showing how the money comes in. I currently get 8% yield with monthly payments so I can easily show compound growth.
in fact, there are tons of ways to invest and make money ;-). You could also build a ETF portfolio with a coach potato management style. What I like about dividend when it comes down to teaching investing is that you actually see the dividend payout made by a company. Mutual funds or ETFs are more complicated to understand for teenagers.
that’s pretty cool! how old it your daughter? Maybe I should start showing investing to my son (he’s 5 😉 ).
Good idea Mike, I can’t wait for my daughter to get a bit older so I can teach her some money skills. Having a dividend porfolio of her own and watching it grow can definitely show the awesome power of dividend investing.
So many people just do not realise that is they buy equities they get dividends too. All the emphasis is on stock market growth and the news to crashes puts small investors off the idea, they think that it is just too risky. Investing in a few “safe” blue chips that pay a good dividend can literally pay dividends in the long term!