In a previous blog, I discussed the thought-provoking conversation I had with my daughter about investing on our drive from Miami to Fort Worth after she graduated from college. We talked about the power of dividend growth investing and how starting early can allow the compounding effects to work magic over decades.
After explaining the concepts to her, the next logical step was to actually help her get started on implementing an investment plan. As her dad, I wanted to give her a hands-on experience to make sure she learns as much as possible through the process and “hope” some of the lessons would stick.
Getting Started
The first thing we had to do was open an investment account for my daughter. There are several good options for new/young investors, including:
- A Roth IRA account
- Utilizing a robo-advisor service (she joked I am her “robo-advisor”)
- Going through a traditional brokerage (Schwab, Fidelity etc..)
After evaluating the pros and cons of each, we decided that opening a Roth IRA made the most sense for her. The tax-advantaged nature of the Roth IRA allows her investments to grow completely tax-free for retirement assuming she follows the rules regarding withdrawals from the account.
Setting an Account
We opted to open a Roth IRA with Charles Schwab that offers a wide selection of commission-free ETFs and no-account fees. This gives her investment flexibility and will help keep costs low.
To take advantage of compound growth, the sooner we can invest her money, the better. My daughter had been diligently squirreling away savings her whole life (birthday money from relatives, earnings from odd jobs, money from college jobs, not to mention her recent graduation gifts). As such she had accumulated well more than the funds required to fund her new Roth IRA with the $6,500 maximum contribution for 2024.
However, even if she did not have that full amount saved up, I would have encouraged her to invest whatever amount she could. As I am trying to get her to understand the most important thing is developing a habit of investing.
Choosing Investments
With her account open and funded, it was time to select her actual investments. We decided to keep things simple by using low-cost ETFs focused on dividend growth stocks.
After reviewing the Dividend Growth Screener on Dividends360.com, we built her portfolio with these three ETFs:
- Schwab U.S. Dividend Equity ETF (SCHD)
- Vanguard Dividend Appreciation ETF (VIG)
- Schwab International Dividend Equity ETF (SCHY)
By splitting her $6,500 investment equally into these three funds, she instantly had a diversified portfolio of quality U.S. and international dividend growth stocks selected by the ETF managers. This allowed her to capture dividend growth while keeping costs low with the ETF expense ratios all under 0.30%.
Our next step will be to set up an automatic investment plan once she begins her job on July 1st allowing her to make automated contributions directly from her checking account prior to having the temptation to spend the money!
The power of compounding investments
If she simply maintains her $6,500 maximum annual Roth IRA contributions and her portfolio compounds at 8% growth, her account could be worth over $1 million by age 62. Even if she made no additional contributions after this year, her initial $6,500 investment alone would still grow to over $100,000 after 30 years, illustrating the powerful effects of compounding returns over time.
As a parent, I feel one of the greatest financial gifts we can give our children is the education to build wealth over their lifetimes. With this hands-on experience, I’m confident my daughter is off to an excellent start. Going forward, I plan to continue having regular financial discussions with her to reinforce these lessons and help her stay on track. Hopefully her future self will remember our long drive from Miami to Fort Worth that started it all!
