[Practical Finance] Dividend Stock Investment Tips for Children

Highly liquid and can be converted to cash anytime
Stock price fluctuation risk exists but volatility is low

Parents with minor children often worry about how to manage money for their children until they reach adulthood. Even if they gift assets up to the deduction limit in advance, the method of asset management can lead to significant differences 10 or 20 years later. Simple savings or deposit products do not offer additional returns, and diving into stock investments blindly raises fears of losses, deepening the dilemma. One method to consider in this situation is investing in dividend stocks.

Higher Returns than Interest Rates... Dividend ETFs Also in Focus

Dividends are a part of a company's earnings (net income) returned to shareholders as a business activity. It is a system to share the company's performance not only with employees but also with shareholders who invested in the company. Usually, companies with steady performance over a long period pay higher dividends.

The advantage of dividend stocks is that, unlike real estate, there is no need to worry about vacancies. In real estate, if tenants leave and rental income disappears, the owner must bear risks such as loan interest or maintenance fees. However, companies do not demand money separately from investors even if they do not pay dividends. Also, compared to real estate, dividend stocks have excellent liquidity and can be converted to cash anytime if needed.

However, there is a risk of stock price fluctuations. When the entire stock market declines, as during COVID-19, dividend stock prices also fall. There is also a possibility that companies may reduce dividends due to unfavorable market conditions. Nevertheless, dividend stocks are generally considered stable because their price fluctuations are smaller on average compared to other stocks.

In Korea, bank stocks are representative dividend stocks. Last year, the average dividend payout ratio of banks was about 25%. This means that if the net income was 1,000 won, 250 won was returned to shareholders. Dividend yields varied from 2% to 7%. Woori Financial Group had the highest yield at 7.6%.

This year, banks' net income increased by 38% compared to the same period last year as of the third quarter. If the dividend policy from last year continues, the dividend amount is expected to grow. However, recently, political circles have raised issues such as introducing a 'windfall tax' on banks' excess profits, increasing uncertainty, so some suggest monitoring the situation closely.

Securities and automobile stocks are also classified as high-dividend stocks. Among securities stocks, Daishin Securities had the highest dividend yield at 8.2% last year, and NH Investment & Securities recorded 7.2%. Hyundai Motor and Kia also showed dividend yields of 3.8% and 5.5%, respectively, last year.

Among U.S. stocks invested in by Seohak Gaemi (Korean individual investors investing in U.S. stocks), Coca-Cola, Broadcom, and Merck are considered high-dividend stocks. Coca-Cola, which has increased dividends every year for the past 60 years, had a dividend payout ratio of 80% last year. Its annual dividend yield is around 3%. Semiconductor technology stock Broadcom and Merck, which owns the immuno-oncology drug 'Keytruda,' have also been paying dividends for over 10 years.

If you want to avoid the risk of price fluctuations of individual stocks, exchange-traded funds (ETFs) that only include dividend stocks can be a good investment option. Among domestic dividend-related ETFs, the 'ARIRANG High Dividend Stock ETF' recorded the highest distribution yield of around 6% last year based on dividends. The ARIRANG High Dividend Stock ETF consists of the top 30 stocks with the highest expected dividend yields among the top 200 KOSPI market capitalization stocks. It showed lower volatility compared to the KOSPI last year.

In the U.S. stock market, there is a dividend ETF called SCHD, the 'Schwab US Dividend Equity ETF.' This ETF tracks the Dow Jones US Dividend 100 Index and includes companies with continuously increasing dividends. It has attracted long-term investors' interest by consistently recording an average annual dividend growth rate of around 13%.

There are similar products among domestic ETFs as well, such as TIGER US Dividend Dow Jones, SOL US Dividend Dow Jones, and ACE US Dividend Dow Jones. They track the same index as SCHD and pay dividends monthly. However, since the fee structure keeps changing, long-term investors should regularly check the fees.

Gift Planning... Stock Accounts Also Available Remotely

Once you find an investment destination for your child, prepare the seed money. For minor children, you can gift up to 20 million won over 10 years without gift tax. For example, gifting 20 million won at age 1 and another 20 million won at age 11 allows a total of 40 million won to be gifted before the child enters university.

One thing to note is that gift tax is calculated by aggregating gifts made within 10 years from the time of gifting. If a child received 10 million won at age 1 and another 10 million won at age 5, only 10 million won, not 20 million won, is exempt from gift tax when gifting at age 11. The gift at age 1 disappears, but the gift at age 5 is included in the 10-year aggregation from the age 11 gifting point.

If you have gifted to your child as planned, open a stock account through a securities company. Recently, with documents such as a family relation certificate, you can open a child's account remotely through each securities company's app. However, since transaction fees vary by securities company and some offer free events, you should carefully review before opening an account.