Posts Tagged ‘Dividend Reinvestment’

I would suggest something that can be added to over time by you and other friends or relatives. In this category, that would include the following:

  • UGMA/UTMA accounts
  • 529 Savings Accounts
  • Zero-Coupon Bonds
  • EE Savings Bonds
  • Individual Corporate or US Treasury Bonds
  • Dividend Reinvestment Plan (DRiP)

1.) UGMA/UTMA accounts that can invest in a diversified fund(s) or use proceeds to buy shares of some large diversified companies – Warren Buffet’s Berkshire Hathaway would work here;

2.) 529 savings account with maybe a target date allocation (tied to when the child is 18 y.o.);

3.) Zero-coupon bond (target face amount could be equal to part of an expected year of college tuition expense for example);

4.) EE Savings Bonds (as mentioned before, the taxes are zero when used for education and you can always buy more of them in reasonable denominations);

5.) Specific company or US Government bonds would have maturities that are close to the time frames you noted.

6.) Participate in a company-sponsored dividend reinvestment program (DRiP) by buying a single share of stock.  When the company issues its dividends, the proceeds will be used to buy shares (even fractional shares) in the company.  Over time, this is a cost effective way to build a stock position.  And since most companies that offer such plans are ones with brand names that children may know, it’s a great way to help kids gain an interest in savings and investing.

On a separate note for longer range thinking, you may also want to consider contributing to a Roth IRA once the child gets older and starts earning his own money from odd jobs, paper routes or the local grocery. If the rules don’t change and the child has earned income, he can contribute some of his earnings (or parents can consider it as long as it doesn’t exceed the total earnings).

Roth IRA proceeds can be tapped to pay toward college or toward a house down payment and if not used can at least be great seed money for retirement. (Yes, the rules could change but something to keep on the radar screen for when the time comes).

Now consider that as a way for a gift to really have a long term impact.

CAUTION: Giving the funds to a child when they reach a certain age without any strings could backfire. That’s why others here have mentioned things like the 529 or a UGMA account. Short of paying for a trust at least these structures allow you to place some restrictions on the use of the funds for the benefit of the child or for education specifically in the case of a 529. So if opening up any type of mutual fund direct with a fund family or even a brokerage account to hold the stocks or bonds suggested, consider having it titled in one of these forms.


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