financial gifting

Best Stocks for Kids: Great Ideas for Your Kid’s Investment Portfolio

May 6, 2022

If you’re thinking about buying stocks for a child in your life, you’re already on the right track. The earlier that kids invest in stocks, the more time that investment has to grow.

Let’s assume you were to invest $1,000 for a child in stocks one single time at birth. This investment could grow to $490,370 by the time that child reaches retirement age. This investment strategy assumes the 10% average long-term return of the U.S. stock market. 

Remember that past performance doesn’t guarantee future returns. The actual investment performance may be different for many reasons, including market fluctuations, time horizon, taxes, and fees.

Regardless, investing now gives you a great chance at setting up the child in your life well financially. Selecting long-term investments for the child in your life increases your chances of meeting your and the child’s investment goals. Whether it’s saving for retirement or college or simply building wealth, stocks are a must-have addition to most portfolios. 

This guide will go over the eight best stocks for kids that you should consider when building your kid’s investment portfolio.

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Can a Child Invest in Stocks?

Typically, kids under the age of 18 can’t buy stocks on their own. Under current law, only individuals ages 18 and over can open investment accounts on their own. Without access to an investment account, a child can’t invest in stocks.

How do I buy stocks for my child?

One of the easiest ways for you to buy stocks for a child is through a custodial account

In a custodial account, you keep control of the assets until the child reaches age 18 or 21, depending on the state. You’ll have control of the account, make investment decisions (e.g., stocks, mutual funds), and withdraw funds if needed. 

There are two main types of custodial accounts:

  • A UGMA custodial account allows you to invest money in most common types of investments, including stocks, bonds, mutual funds, and annuities. 
  • A UTMA custodial account allows you to make the same investments as those in a UGMA custodial account and also in alternative assets (e.g., real estate, jewelry, collectibles).

A custodial ROTH IRA is a specific type of custodial account for a minor’s retirement savings. This investment vehicle also allows you to buy stocks for a child.

 Image showing the difference between a Custodial Roth IRA and a normal Roth IRA
(Image Source)

How Do You Choose Stocks for Kids?

Here is the set of criteria you can follow to help you choose stocks for kids:

Real stocks only

By real stocks, we mean long-term companies with a proven business model, a history of profitability, and a high chance of survival.

Eligible investment options

You’ll need to stick to eligible investment options for a UGMA, UTMA, or custodial Roth IRA account. So, you’ll want to focus on individual stocks, mutual funds, or exchange-traded funds (ETFs).

ETFs vs. Mutual Funds vs. Stocks
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An ETF trades on a stock exchange and invests in a basket of securities, such as individual stocks, bonds, or commodities.

Long-term investments

You’ll want to choose investments that you plan to buy and hold for a really long time. This is partly because of the restrictions that are placed on the different types of custodial accounts.

For example, you’re not supposed to withdraw funds in a Roth IRA until retirement age (age 62 and up) under most circumstances.

Domestic companies 

The point of choosing stocks that trade in American stock markets is that you get the peace of mind of well-regulated domestic stock markets and avoid extra steps and fees.

Consistent dividend payment

It’s often smart to choose a company with a history of issuing a quarterly or annual dividend. A company’s ability to consistently pay its shareholders is a sign of a stable business model.

The higher the dividend yield, the better. 

Dividend Yield definition
(Image source)

The company's leadership should show no signs of wanting to cut back or suspend in the years to come. One caveat is that many high-growth tech companies pay no dividends.

What Are The 8 Best Stocks to Buy Right Now in 2022? 

While you can choose individual stocks, it’s also important to consider low-cost stock market index funds that track several stocks. This type of security often trades as an exchange-traded fund (ETF). 

For example, a S&P 500 index fund ETF holds the same 500 large, publicly-traded companies included in the S&P 500 market index. By investing in a S&P 500 ETF, you’re investing in 500 companies instead of just one.

Here are the top stocks (and ETFs) for you to consider buying for the child in your life this year.

1. Vanguard Total Stock Market ETF (VTI)

Diversification and low-cost make a broad market, low-cost ETF that tracks a large basket of domestic securities the top choice for a child’s custodial account. 

A great example is the VTI which holds a wide range of U.S. stocks to track the U.S. stock market.

Why it’s a great stock for kids: An investment of $10,000 on January 1, 2012, would have grown to $37,873.25 as of March 31, 2022.

Chart showing Vanguard Total Stock Market ETF hypothetical growth
(Image Source)

This type of long-term growth is the one that you should look at when choosing stocks for kids (who have time on their side). 

Plus, it is a low-cost index fund (a fund that holds a wide range of stocks over the long term with minimal management fees). As of April 29, 2022, you only pay $0.03 for every $1,000 you hold in this ETF.

Things to watch out for: Long-term growth doesn’t mean that you won’t experience some downturns in the short term. Using the same example of the $10,000 in the VTI ETF in 2012, you would have been sitting at $26,327.60 before the COVID-19 pandemic. At the bottom of the pandemic, your portfolio would have sunk to $20,841.68.

2. Disney

To get your child interested in investing at an early age, you should choose individual stocks that they’ll recognize. Disney is the company behind some of most kids’ favorite shows and movies, and an investment that the kid in your life could find fun!

Why it’s a great stock for kids: Disney has a diversified business portfolio of amusement parks, film studios, television stations, and streaming services. This diversity enables Disney to pivot during challenging times like the height of the COVID-19 pandemic in 2020-2021.

Things to watch out for: A diverse business portfolio can also bring a diverse set of operational problems. In 2022, Disney continues to face problems navigating COVID-19 restrictions for its cruise ship business. Additionally, Disney faced backlash for the bang-for-buck factor of the $6,000 price tag for a two-night hotel stay at the Star Wars-themed Galactic Starcruiser Hotel.

3. McDonald’s

McDonald’s isn't only one of the largest companies in the world, but it’s also one of the favorite companies for many kids for a quick meal.

Why it’s a great stock for kids: Over the last 44 years, McDonald’s has increased its annual dividend. McDonald’s dividend growth rate over the last ten years (7.38%) is higher than that of the sector’s median over the same period (5.58%).

Things to watch out for: McDonald’s has a higher controversy level than that of its industry peers. While the company’s leadership has been able to navigate well around Environment, Social, and Governance (ESG) issues like the impact of its supply chain, it may continue to face similar challenges in the future.

4. Microsoft

Microsoft has long been one of the favorite companies of buy-and-hold investors. Its Xbox and Activision properties also make the Redmond giant one of the biggest video game companies.

Why it’s a great stock for kids: Microsoft’s savvy transition from desktop computing to cloud computing and focus on business infrastructure services set a solid foundation for the company for several decades. Additionally, Microsoft has other solid business lines in gaming (Xbox) and social media (Linkedin).

Things to watch out for: The company’s stock isn’t cheap, and its current high market valuation may be tough to sustain in the long run.

5. AT&T

This American multinational has been around since 1983. While the stock price has its ups and downs, the company has consistently paid out dividends to investors. 

Also, its current price may present a valuable opportunity for adding it to a child’s portfolio.

Graph showing AT&T stock growth over time
(Image Source)

Why it’s a great stock for kids: The company has raised its dividend for over 25 years in a row, currently with a dividend yield of 8.98% as of March 2022.

Things to watch out for: Current CEO John Stankey has a lackluster record with the troubled integration of DIRECTV and takeover of Time Warner. Also, the company’s current streaming strategy is falling a bit behind that of its industry peers.

6. NVIDIA

The current situation of the chip manufacturing industry bodes well for computer graphic processor makers. As more and more products need this chip, NVIDIA is well-poised for long-term growth.

Why it’s a great stock for kids: From cars to smartphones, everything needs a chip nowadays. NVIDIA is poised well to ride the positive outlook of its industry — plus, it pays a dividend.

Things to watch out for: The intense competition within chip manufacturing may cause some mergers and acquisitions (M&A) in the future. Keep an eye on any M&A news that could affect NVIDIA.

7. Apple

Buying the stock of a company that makes products that the child in your life uses daily increases the child’s potential interest in investments.

Why it’s a great stock for kids: The company has been consistently churning out innovative products since 1979. The iMac, iPod, iPhone, and iPad are just some of the household names that you’re familiar with. And you can expect many more in the future.

Things to watch out for: No company is exempt from flops. Apple has released some duds in the past (remember the Newton and Quicktake?). 

8. The Home Depot

It’s all about the company’s balance sheet. This company generated net earnings of over $16.4 billion in 2021.

Why it’s a great stock for kids: The Home Depot has a very strong balance sheet that indicates the company will be sustainable for a very long time. It also consistently pays out a high dividend yield.

Things to watch out for: The Home Depot’s stock price experienced massive growth during the pandemic. This growth pace may not be sustainable for a long time, so some analysts expect a price pullback in the near future.

Conclusion

It’s never too early to start investing for the child in your life. And making an investment in stocks for a child is a smart choice. By choosing U.S.-based stocks and holding them for a long time, you are increasing the chances of that child’s portfolio reaching an average annual 10% long-term return.

There are many types of accounts that can help you make investments for the children in your life. UGMA custodial accounts, custodial ROTH IRA accounts, and 529 plans are popular options that allow you to include stocks and ETFs in your child’s portfolio.

If you’re looking for guidance in determining the right choice for the child in your life, check out our investment strategy content on the EarlyBird blog.

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