Smart Reasons to Save, Use and Invest Money

Paying Allowances From Dividend Stocks

Paying Allowances From Dividend Stocks:

First let me start by saying that I wish I had thought of this 10+ years ago!  The following is an idea that I would have liked to pursue for my kids, and while it’s still possible, the upfront investment for such a dividend stream is a bit steep for me right now.  So instead, I will introduce the idea to see if others may find value in such simple idea.

What I wish I would have done was buy some solid, reliable dividend stocks each year and have the dividend payout from the stock go to my kids as an allowance instead of me paying for their allowance out of my wallet each and every week.  Of course, the earlier years of the dividend payout would go directly back into the dividend paying stock during the ages when the child was too young to receive such an allowance.

I might even have the kids receive the payout once a quarter, just to get them use to quarterly payouts instead of weekly ones.

The following chart calculation is a very simplified table that will give a ballpark number.

       
    Div PayoutDiv Interest 
 Year 1Contribs.PrinciplePercentAmount 
 11200$1,2000.05$60 
 21200$2,4600.05$123 
 31200$3,7830.05$189 
 41200$5,1720.05$259 
 51200$6,6310.05$332 
 61200$8,1620.05$408 
 71200$9,7700.05$489 
 81200$11,4590.05$573 
 91200$13,2320.05$662 
 101200$15,0930.05$755 
       
     52 
     $14.51 
       

So using the table above, the payout in a childs 10th year could be $14 dollar based on a 5% dividend payout rate.  The table above doesn’t take into account taxes, so the actual dividend payout will be a bit lower that the number suggested in the table, but not enough to discount the value of the information!

Yet Another Stealth Emergency Fund:

Recently, I wrote about my stealth emergency fund, and these stocks could be used as yet another form of an emergency fund.  Would I be tempted to use these dividend stocks for an emergency first?  No, only after the regular savings from an emergency fund has been depleted would I consider these stocks.  That said, it’s still definitely a consideration!

Conclusion:

I was considering trying this idea, but after writing about it, I think I may have missed the boat on the implementation of this concept.  It would have be easier to implement the idea earlier while your kids are very young!  So while I really like this idea, I will put my money in dividend yielding stock for other purposes than and allowance fund.  If I have the other ideas fully funded, I make come back to this one and give it a try.

Have you consider creating such an idea for your kid allowance needs?  It’s kind of a win-win if you think about it.  You get to pay your kids an allowance, and at the same time you have a portfolio of dividend stocks that may continue to grow!

-MR

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22 Responses to Paying Allowances From Dividend Stocks

  1. This is absolutely brilliant and a cool gift idea especially if you get the kid a stock that’s fun like disney or a toy company or something.

    You have to write a post about how to do it on a small scale that requires a low minimum balance. Thanks.

    • Thanks, if I were to do it today, I go with McDonalds or Disney. I like McDonalds because of the decent dividend and the potential expansion into China. Disney is great too, but their dividend is much smaller.

      • One of my customers sells to McDonalds and they are growing like crazy. Despite the recession, they’ve been flat or up due to the amount of stores they are opening in emerging markets. I don’t know what it’s trading at or if it’s a good buy right now, but it’s a solid company.

        • Ironically, we own a few thousand dollars worth of share before “The Great Recession”, hit, and back then I bought in at 62, now it’s 72. So not a huge gain, but not bad considering how bad the market was.

          We bought in for the dividend…

  2. It is a great idea. I wish I was wealthy enough to have dividends to pay for all my expenses.

    It is always great when you feel you expenses are covered with ‘free money’, which dividends kind of are.

    • That’s a dream I had as a young adult! I use to think it would be cool to have dividends pay for Xmas, Cars, and all my other expenses…

      Currently, I’m happy just to be starting the journey 🙂

      We’ll get there 🙂

  3. It seems like you are just thinking of additional reasons as to why you want the stream of income?
    – Lunch
    – Kids Allowances

    Its not a bad thing just an observation from my POV

    • I’ve had small streams of dividends from companies like Mobil Oil, Bell Atlantic, First Energy and others, but the streams was very small because I didn’t have much invested in them.

      But being totally debt-free I have the option to make a dent into this area… So it’s all choices, choices, choices now…

      The Lunch experiment was special though because it was free in that it didn’t really cost me anything other than missed times out at lunch with friends at work. But now I even have that option a few times a week now 🙂

  4. I cringe at how much stock we’d have to own to afford my husband’s hobbies, lol (he’s the closest thing to a kid I have…). We’ll be there someday but not quite yet. 🙂

    • Thanks Jessica, I wish I had thought of this around when my son was born… Even a small savings back then would have at least got me started…

  5. Not a bad idea.
    We haven’t considered giving out allowances. The boys however do have the opportunity to earn cash with “money chores” around the house.

  6. Very interesting. I’ve been starting to think of ways (and more importantly, when) I’ll introduce my daughter to how investing works. Still dealing with the basics on money in general right now, and really I’m more into her being a kid at 7.

    That said, I like your idea even though you might not implement it. There are multiple benefits to your approach. Creative thinking and food for thought.

  7. What a novel idea! I love it. A neat, tangible way to get kids to appreciate the importance of saving and investing. If you start late, I suppose you could combine it with an allowance such that their “base salary” came from you and their “variable comp” came from incrementally growing dividends over the years.