THE BEST INVESTMENTS FOR YOUR KIDS TO OWN
(MONEY Magazine) – The best way to help a hungry man, the saying goes, isn't to give him a fish. Give him a fishing rod instead, and teach him to catch his own. Same with your kids. The best investment you will ever give them isn't last week's Internet IPO or the growth fund du jour. Rather, give them the basic lessons of financial life: that you have to save, and that your reward is proportional to the risks you take.
For that reason, the experts we consulted strongly urge that you choose an investment for your kids with an eye not just to its potential return but also to its potential to teach.
Here are our suggestions, starting with the most basic:
--Savings account. Granted, there is nothing particularly cool about opening a 3% bank account--unless you're five years old and have never done it before. Many banks actually discourage small savers by charging fees on accounts with low balances. But if your institution accepts small accounts or will let you link your child's account to yours, it's a good start. It makes the point that savings add up if you leave them alone and--wonder of wonders--you get paid interest for doing so.
If your bank doesn't want your child's loose change, open an account at the Young Americans Bank in Denver (303-321-2265). YAB's customers are all under age 21, and the account minimum is $10. Kids can mail in their deposits or send them electronically via ATM. For those who wish to visit, the bank has discreetly placed a stool in front of each teller window so that pint-size clients can conduct business face to face. If you live near Denver, you and your child can also attend the educational programs that YAB runs monthly, such as a seminar about fund investing, which is co-sponsored by Invesco mutual funds.
--Savings bonds. Your kids may already be familiar with Series EE bonds, since they probably received a few from doting relatives at birth or graduation. The bonds' yield, if held for more than five years, is pegged at 85% of the five-year Treasury rate and currently stands at 4.85%.
As a beginning investment, savings bonds have two nice features: They're safe and they're cheap. The bonds are guaranteed obligations of the U.S. Government and exempt from state and local taxes. Moreover, Series EE bonds are issued in denominations as low as $50, which you buy at half the face value (or a minimum of $25) from most commercial banks. The bonds then accrue interest to reach the face amount in 17 years or less. To show your child how his investment is growing, update the bonds' current value every six months by calling your bank.
--Equity mutual funds. The only investment with a prayer of growing faster than your kids' tuition bills, stocks have returned an average annual 10.5% since 1926. That's well ahead of the 6.2% clip for college costs. And since kids are nothing if not long-term investors, they can ride out the market's ups and downs.
Fidelity drops its minimum investment from $2,500 to $1,000 if you sign up for its College Savings Plan, which offers you a choice of four Fidelity stock funds and one money market. You can start by putting as little as $100 a month into the money- market account until you have accumulated $1,000; at that point your money is automatically transferred to the equity fund of your choosing. Sales charges, which can be as high as 3%, are waived if the account is opened in a kid's name.
Stein Roe & Farnham's no-load Young Investor Fund (800-403-KIDS) also drops its minimum from $2,500 to $1,000 for a kid's account (more specifically a Uniform Gifts to Minors account, or UGMA). Agree to put in $50 a month, and the minimum is halved to $500. The prospectus says the fund buys stocks that "appeal to or affect the lives of children or teenagers." For example, among the top 10 holdings are Nabisco, Nike and Sitel, which sells telemarketing services to other companies and mans the Barbie hotline for Mattel. Each quarter, young investors receive the Dollar Digest newsletter with quizzes, investment tips and profiles of companies owned by the fund.
--Individual stocks. Stock analysts are hot on the long-term growth prospects for companies with widely recognized global brand names. Fortunately, these are the companies that kids know best. Take $30.4 billion PepsiCo (ticker symbol: PEP; recently traded on the New York Stock Exchange at $67.75). Breathes there a child in the U.S. who doesn't know Pizza Hut or Doritos? As Pepsi extends its reach abroad, Marc Cohen, a beverage analyst at Goldman Sachs, predicts that the stock will appreciate to the upper $30s in 12 months after a two-for-one stock split in late May. His kicker: "It's in my kids' portfolio."
Howard Penney, Morgan Stanley's restaurant analyst, says $9.8 billion McDonald's (MCD; NYSE, $49), besides offering the burgers that kids crave, is aggressively expanding its strong brand name overseas. He sees earnings growing an average 14% annually for the next five years and the stock price rising to $59 in 12 months. On looks alone, you can't go far wrong with an investment in $12 billion Disney (DIS; NYSE; $62). Bambi, Cinderella, Donald Duck, Dumbo, Mickey Mouse, Pinocchio and Winnie-the-Pooh all cavort on the stock certificate. On a more substantial note, analyst Jill Krutick at Smith Barney adds that the merger with Capital Cities/ABC has increased Disney's vast distribution channel, and the company has some strong films in its pipeline including The Hunchback of Notre Dame and a new 101 Dalmatians. She expects to see the stock hit $73 in the next 12 to 18 months.
Your kids also assuredly know $4.8 billion Nike (NKE; NYSE, $101.25). Scott Emerman, a retail analyst at Dean Witter Reynolds, notes that earnings of the world's leading sneaker manufacturer have grown 50% during the past six quarters--thanks largely, no doubt, to the innumerable $115 Air Jordans you've bought your kids. Emerman sees the stock at $120 in 12 months, for a return of 19%.
Finally there's $259 million Gymboree (GYMB; NASDAQ, $33.25), which specialty retail analyst Dana Telsey at Bear Stearns admires for being "a retailer that has branded its concept" of high-quality children's sportswear much the way The Gap did for adults. She thinks the company's increases in gross margins, as well as new stores and same-store sales, will lead to a $42 stock over the next 12 to 15 months.
Alison Rogers is an associate editor at Worldbusiness magazine.