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Roth IRAs and Your Kids 05/25/17

Give A Congratulatory Gift That Keeps Growing


    Spring and summer mark significant milestones for many younger people. There are graduations and weddings—events that mark important accomplishments and lifelong commitments. These occasions often call for a significant gift.


    While it’s easy to write a check, it’s impersonal and well, unimaginative. The worst part is that the only distinction between your gift and the next one is the dollar amount.


    For the past several years we have offered an alternative to the traditional cash gift. A thoughtful gift that keeps on growing year after year and introduces the youngster(s) to a sound and proven investing strategy. The strategy is dollar-cost averaging and the gift is a five-stock portfolio held in dividend reinvestment plans (DRIPs) to make it easy and efficient to follow that strategy.


    Your total cost to set up such a gift portfolio is generally around $500 (depending on the price of the stocks you select). In addition to the financial benefit, which has the potential to compound to substantial wealth over the long-term (as we demonstrate later), this gift will provide the recipient(s) with a first-hand experience of a logical approach to building wealth by investing in stocks.


    By “saving” in the stock of the companies in this DRIP portfolio, your young investor(s) have the opportunity to build wealth with cash investments of as little as $25 at a time. These small investments are likely to compound into real wealth based on the historical returns of the stock market over long periods of time.


    Let’s assume that the graduate, the young couple (or you on their behalf), invest $1,500 a year for the next five years—that’s $125 a month spread evenly among the five high-quality, dividend-paying companies in the portfolio ($25 in each company every month). Let’s also say that no further investments are EVER going to be made into those accounts.


    What would the total $7,500 (invested over five years) turn into? The answer will surprise you…


    Assuming a 7% return compounded annually, you’ll have $8,801 at the end of your first five years. Leave that alone and make no more contributions and your investment would grow to $184,843 in 45 years assuming a conservative 7% annual average return compounded.


    Now, let’s use a more realistic assumption: that is, that the average annualized growth rate is 11%, which approximates the long-term return achieved by the market as a whole as calculated by the Ibbotson organization.


    Assuming a 11% return compounded annually, you’ll have $9,552 at the end of your first five years. Leave that alone and make no more contributions and your investment would grow to $1,046,233 in 45 years.


    Now that's a substantial gift!


    Add another 1% return to your assumptions (because this five-company stock portfolio may well beat the results of the market as a whole) and your gift will provide a retirement portfolio worth $1,598,715. Now you can see the value of an extra percentage point over the long term. That 1% is what many people are needlessly paying in fees and commissions.


    Every year we pick five companies worthy of your consideration for such a gift. To qualify for inclusion in our list, these companies must have consistently paid dividends for at least 10 years, they must offer a company-sponsored DRIP where dividends can be automatically reinvested, and the company plan must not charge fees or commissions for investments and/or reinvestments. With such a portfolio, your long-term results are likely to exceed the 11% results achieved by the market as a whole.


    The five-stock portfolio for 2017 seasonal gift-giving:


    Hormel (HRL)a food service company that produces a wide range of meat products.


    MDU Resources (MDU) – a diversified natural resource company.


    Polaris Industries (PII) – designs, engineers and manufactures off-road vehicles including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and global adjacent markets vehicles, together with the related parts, garments and accessories.


    3M Company (MMM) – a diversified technology company.


    Abbott Laboratories (ABT) – a healthcare company engaged in the discovery, development, manufacture and sale of a diversified line of healthcare products.


    The best way to set up this portfolio is to purchase the stock directly by enrolling in the company’s DRIP. That way you won’t pay commissions and your dividends will be automatically reinvested to compound over the years. Enrollment in these companies is available through the Temper Enrollment Service with the purchase of a single share of company stock. For a full list of no-fee DRIPs, click here.