Children’s Allowance With Dividends

At the suggestion of the moneygardener, I’m writing about the method I used to pay my kids an allowance with stock dividends. This method of paying allowances was also suggested in the book The Lazy Investor (see review here).

Back in the year 2000, I decided to stop giving my kids an allowance out of my pocket. I bought 100 shares of the Bank of Montreal for each of them. Initially it paid them $50 every 3 months, a modest allowance.

A nice side effect of this is that instead of having to lecture them about the value of stock ownership, I actually had them coming to me with questions about where the money was coming from, and whether the dividend would increase, and so on. Anything that reduces the number of speeches I have to give to kids who aren’t interested in listening is a good thing.

My kids were always happy to see the account statement when the dividends came in, particularly if the dividend had increased. Fortunately, the Bank of Montreal increased the dividend each year giving my kids a nice raise.

There was even a stock split one year that gave me a chance to explain why this wasn’t really a big deal. There were twice as many shares, but the dividend was only half as much for each share. Stock splits are usually as sign of good past performance, but they mean little for the future.

Now the dividend is up to 70 cents per share ($1.40 per original share that I bought). This is a 180% increase over the last 8 years. The drop in stock value has been a little tough, but this has been a good lesson for the kids as well. At least the dividend hasn’t gone down.

The only down side of this approach as far as I’m aware is the need for capital to buy shares initially. On the plus side are the good lessons and not having to dig money out of my pocket every week.

Comments

  1. MG (moneygardener)July 2, 2008 at 11:29 PM

    thanks Michael. This is an awesome idea and one I will certainly set up for our kid(s). Thanks for sharing.

    ReplyDelete
  2. geneJuly 3, 2008 at 5:02 PM

    Brilliant idea. It sure does teach the kids a lot about investing, especially if you were to gift the stock to them on their 18th birthday.

    One benefit you didn't mention is that since they only get paid once a quarter, they have to budget for the whole three months. It also gives you the freedom to ignore weekly pleas for money. "Don't ask me, ask David Galloway, your Chairman of the Board."

    Later on, you could ask the kids if they wanted to diversify their holdings. They could divide the portfolio into four different stocks with different dividend dates.

    ReplyDelete
  3. Michael JamesJuly 3, 2008 at 5:46 PM

    Gene: You're right. There are many different directions you can take this approach to allowances to teach more about investing.

    ReplyDelete

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