Giving the Gift of Dividends

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To celebrate my son's third birthday, I'm giving him an unusual gift this year. It's an investment in his future, and one that you may want to consider for your kids or grandchildren too.

As excited as I was to see the grin on his face when he opened his big birthday gift, a kid-sized John Deere tractor, the "real" gift is much more meaningful. And I know that in 10 or 20 years, he'll be thanking me.

That's because I'm making a small investment in his future.  I'll be buying a select group of stocks that almost always outperform the stock market.  It's just the right kind of investment for someone with a long time horizon.

The stocks that I'll be buying for my son are "dividend growers."

These are companies that have a history of increasing the size of their dividend payments.  They're financially fit and committed to returning capital to shareholders. As a result, they return more profits in the form of dividend payments year-after-year.

Now, these stocks often aren't the highest yielding stocks. And some of them frankly have low dividend yields of just 1 - 3%. But the yield isn't what matters.

While the dividends help contribute to the gains, the real profits are from capital gains. That's because a company that regularly raises it's dividend by 10% every year will likely see it's stock increase by about 10% too.  And when you add that capital gain and the dividend yield, you get a market beating total return.

Data from investment firms BlackRock and Deutsche Bank found that since 1986, S&P 500 stocks with the highest dividend growth rates fared best. The firms reported that the fastest dividend growers delivered total returns of 20.5% versus 13% gains from the highest yielding stocks.

For someone like my three-year old son - with a very long time horizon - investing for total return makes the most sense. After all, he doesn't need the income today to pay his bills.

In short, I'll be opening up an online brokerage account for my son, and buying shares of a handful of dividend growers. In addition to buying the stocks, I'll be enrolling him in the divided reinvestment program of each company.

Of course, I could just buy an ETF of dividend growers - like the PowerShares Dividend Achievers ( PFM ) or the Morningstar Dividend Leaders ( FDL ). However, I personally prefer handpicking stocks that will be thriving in the years to come, and growing their dividends along the way.

I know first hand that owning dividend growers, reinvesting the dividends, and holding onto those stocks for 10 or 15 years is a great way to build meaningful wealth.

After all, this was exactly what my grandparents did in the early 1980s when they gave me a few shares of Exxon. That small gift grew considerably in value, and kicked off my passion for the stock market at a young age.  But I'll tell you that story another day…I hope that by giving my son a similar gift, he too will begin building wealth from a young age.

If you have young people in your life, even a token investment in one of these dividend growers could make a huge difference in their lives. And you don't have to be rich to give this gift.

If you've made investments for your children or grandchildren, I would love to hear from you. What stocks have you bought for your family members?  Drop me an email to share your story. You can reach me at editor@incomeandprosperity.com 

P.S. It'll be a short week here at Wyatt Investment Research.  Our office will be closed on July 4 th and 5 th in observation of the Independence Day holiday in the U.S. You can expect to receive Income & Prosperity Monday through Wednesday this week. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: FDL , PFM

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