Should our kids have to start from scratch? People say how wonderful it is to become a self-made individual, but is that what we want from our kids?
My parents didn’t give me a head start financially, so I spent years treading water. I could have spent these years building upon what they created—if they had had the resources.
What is generational wealth? In my words, generational wealth allows the power of compounding to continue past your lifetime.
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Some consider compounding the 8th wonder of the world. Compounding is the concept of your money making money on its own.
But compounding goes beyond money; it also pertains to relationships and education. Everything we learn compounds into something new.
In most scenarios, the power of compounding dies with the owner. However, when we introduce generational wealth, we can continue the process of compounding throughout multiple generations.
Let’s get started with generational wealth. We start our mission to build generational wealth with dividends. Dividends are payments you receive from the profits of companies you own via stocks.
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Dividends-paying stocks are the most straightforward way to leave wealth to your children. It is easy to set up multiple brokerage accounts and assign them to different children upon your death.
For example, I have six brokerage accounts currently. I can easily give three to each of my sons and give my wife the life insurance policy.
But what kind of stocks and exchange-traded funds should you purchase now to ensure your wealth continues past your lifetime?
Buying blue-chip companies is ideal. Dividend growth investing (DGI) is the art of owning blue-chip dividend-paying stocks over a long time horizon.
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DGI stocks, like Apple (APPL), Microsoft (MFST), Costco (COST), and Johnson & Johnson (JNJ), make great candidates for your generational wealth portfolio.
Over the years, their stock prices SHOULD climb as their dividend payments increase. You should be sitting on a lot of capital gains and income later in life.
However, many companies won’t last for multiple generations; that’s just the way of business. Therefore, we must teach our kids how to search and purchase new DGI stocks that will last their lifetime.
The good news is that they can use the dividend income from the DGI portfolio to conduct new purchases in younger corporations.
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DGI is an exciting process. For the most part, you can purchase 20 different companies and dollar-cost average over your time horizon.
Every year, you should look into the health of your companies and perhaps add another younger company to your portfolio.
ETFs make generational wealth even easier. It’s challenging to beat the gains of the S&P 500 for multiple years in a row. Even the best investors fail to beat the returns of an S&P 500 index fund over 5-10 years.
If you can’t beat them, join them. Index funds are a great investment for your generational wealth portfolio because they are truly “set and forget.”
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I prefer index funds that track the major indices like the S&P 500 (SPY), Dow Jones Industrial Average (DIA), Nasdaq 100 (QQQ), and the overall stock market (VTI).
You can simply purchase these index funds over your lifetime and leave a great gift to your kids and grandkids. These index funds also pay small dividends.
It’s a good idea to teach your kids and grandkids what these indices represent. This way, they know the difference between value (DIA) and growth (QQQ) investing.
Can you leave an income investing portfolio? I am a hardcore income investor, as it is my favorite type of investing.
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But how does leaving an income investing portfolio look? Business development companies (BDCs) and real estate investment trusts (REITs) will greatly add to your generational wealth portfolio.
These Regulated Investment Companies (RICs) specialize in providing their shareholders with income. However, other income-investing products may not fare so well.
Preferred shares usually have a 5-10-year horizon. They can float past their call date, but probably not for 30-40 years.
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If you want to leave a group of preferred shares to the next generations, you’ll want to show them how to purchase more when they receive money when companies redeem them.
Closed-end funds also may not last 30-50 years. They usually have an end date on their existence. So, it is imperative that you explain how to purchase more CEFs as their current ones close.
Putting it all together. How can a dividend portfolio assist your future generations? We can all use income, especially in our early years (18-40).
Can you imagine having $2,000 to $4,000 in passive income coming in when you were 18 years old? Sure, we would probably waste a lot of it.
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However, that’s why it is crucial for parents to show kids how to manage money. Dave Ramsey’s book “Smart Money Smart Kids” is a great place to start.
Many people worry about spoiling kids or their kids becoming complacent because they have money coming in passively.
I like to think higher of my kids. Yes, they won’t have to struggle as hard as we did. But they will face their own set of challenges.
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Wouldn’t it be nice to be able to transition careers without the fear of losing your home? That’s the power of having a dividend portfolio, and we can give this incredible gift to our kids!
Conclusion. The best part of a dividend portfolio is that we can give the gift of income while still alive.
When we pass, we simply transfer our accounts to our kids and grandkids. The most critical part of dividend investing is explaining what it represents to our kids.
It is very easy for our people to see a large lump sum of money (say $1 million) and liquidate it quickly. However, it represents $40,000 to $80,000 a year in dividend income.
Once they comprehend the power of income (versus capital gains), they can appreciate the value of having a massive dividend portfolio.
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It’s tough to bypass the instant satisfaction of getting $1 million in cash and keep it for income instead. However, I believe in our kids’ ability to visualize a life full of income.
As we continue the series, we will see the same scenario play out across investment strategies. Whether it is a business or a house, we must teach our kids the value of income versus realizing capital gains (selling their assets).
With the proper education, our kids are well on their way to using the power of compounding to lead extraordinary lives. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.All Right Reserved Military Family Investing
