Have you ever heard about the DRIP savings plan?
Putting money in the stock market has traditionally been a great way to grow your money over the long term. There are many different options to consider when investing, such as setting up a brokerage account, fee-based money management, using mutual funds and ETF’s, to name a few. Many of these programs allow people to save a variety of financial needs, and have different features and benefits.
Consider saving for college for example, there’s the 529 plan, which where I live in Arizona, is sponsored by Fidelity. There’s also the Uniform Gift to Minors (UGMA) or Uniform Transfers to Minor (UTMA), which are somewhat similar. The only difference is that the UTMA can hold virtually any type of investment including real estate, unlike the UGMA. While assets made into these accounts are irrevocable (they belong to the child), parents have control up to 21 years old. Remember that these accounts can potentially affect financial aid because the assets are considered in the name of the child, which can count more heavily against the availability of aid.
However, whether it’s for college, retirement or other financial goals, I feel another program is often overlooked, Dividend Reinvestment Plans (DRIP’s). These plans allow you to purchase additional shares of stock directly through the company, like Coca Cola or Johnson & Johnson for example. Once you own a share of stock, you can get enrolled in their dividend reinvestment program. Many brokerage accounts allow this, and there’s even DRIP services like Computershare.com or DirectInvesting.com The great news is that any time the company paid a dividend, you have those automatically reinvested into more shares of stock. You can even add more money anytime by purchasing more shares, such as an automatic monthly investment plan with smaller dollar amounts. It depends on the company minimums, but I have added as little as $25 per month when I first started out. There may be fees to participate, so just be aware of those which are usually explained in documents for the plan.
I realize that this investing can have its ups and downs, but this is also a great way to buy good, dividend paying stocks, do dollar cost averaging and build your shares over time. What’s crazy is how surprised you will be seeing what this money can grow and compound to over time. It’s important to use a DRIP as a longer term piece of your portfolio, but with so many stocks to choose a portfolio of stocks to fit your investment needs. Also, if you need money, you can easily sell off a piece of your shares, or your entire position as needed, setting up the money to de directly deposited into your bank account.
As parents we need to take an active role in teaching our kids about finances, we especially like what it did for our kids and teaching them some investing basics. We had our kids pick a company that they liked, one of my sons wanted Nike because he as active in sports and used their gear. Our daughter chose Verizon because she uses their phone service, because sometimes the best ways to pick a stock is what you use, know and like about the company and their products. and my daughter chose Verizon. It has been a great way to explain how stocks work, they have fun tracking it and have even added money from their jobs, special events, etc. They also get statements with their accounts, so it is easy to track the results and it’s another teaching moment on how to read and review the account.
There are rules to follow when setting up accounts for a minor, but they have representatives that can answer your questions. You could set-up a joint account and manage the account until the child is an adult. Remember, that the social security number usually determines who is responsible for taxes. There are different tax planning strategies with children, how to set-up the accounts, gifting techniques and possible children tax credits to consider when establishing your account, so get some advice from a professional is advisable. Finally, you can encourage grandparents, other family members, etc. to put money into these stock accounts to help them accumulate more shares, build for college or to make gifts so be creative.
Setting up a Dividend Reinvestment stock plan can be another great way to save for you, your kids, or even give a share of stock as a gift (giftastock.com). High quality, dividend paying stocks are a big portion of the Standard’s and Poor’s (S&P 500) index, and often comprise companies that are established and recognizable. It can be a great teaching tool, and a fun way to start investing that usually is very affordable.
Mr. Moran is a managing partner for HealthierMoney, specializing in financial education, protecting against unexpected risks, and provides strategies that are lower risk or tax favored. He has over 35 years of financial experience and can be reached at (602) 571-1035 or healthiermoney.com