Creating a legacy – Kids’ Dividend Portfolio 2019 Update

If you are a long time reader, you may recall that back in 2014 we created a dividend portfolio for Baby T1.0 using ShareOwner. We put $12,000 in this investment account and picked 15 Canadian and US dividend stocks. The idea was simple – we wanted to take advantage of the power of compounding by fully reinvest all the dividend income. After the initial cash deposits, we didn’t plan to add any additional cash. It was our hope that this dividend portfolio would generate a good amount of passive income after decades of compounding. If so, it would set Baby T1.0 up nicely for becoming financially independent at a young age.

When Baby T2.0 was born in 2016, we thought about creating the same dividend portfolio with the same amount of money for her. By then we were very focused on growing our dividend portfolio and generating more dividend income to cover our expenses by our early 40’s. Therefore, rather than creating another dividend portfolio for Baby T2.0, we decided that the two kids would share one dividend portfolio.

Stocks in Kids’ Dividend Portfolio

When we constructed this dividend portfolio in 2014, we picked 8 US dividend stocks and 7 Canadian dividend stocks across different sectors. We wanted to pick solid companies that would continue to pay and grow dividends for many years to come. We focused on companies with products and services that people would use on a daily basis. The kids should, therefore, have some familiarities with these companies when they are older.

  • BlackRock Inc (BLK)
  • Walt Disney Co (DIS)
  • Enbridge (ENB.TO)
  • Fortis (FTS.TO)
  • General Mills (GIS)
  • Johnson & Johnson (JNJ)
  • Procter & Gamble (PG)
  • Qualcomm (QCOM)
  • Royal Bank (RY.TO)
  • Shaw Communications (SJR.B)
  • Suncor Energy (SU.TO)
  • Telus (T.TO)
  • TD Bank (TD.TO)
  • Visa (V)
  • Verizon (VZ)

After almost 5 years, we are pleased with the stock selection. Would I have changed any selections? Perhaps. With hindsight being 20/20, we probably would have picked Microsoft over Qualcomm, Starbucks over General Mills, and maybe picked another Canadian bank instead of a telecommunication company (For example, picking Bank of Montreal instead of Shaw Communications).

Also, because index ETFs offer instant diversification, perhaps we should have included one or two index ETFs like Vanguard ex-Canada All Cap (VXC.TO) and another all Canadian index ETF in this dividend portfolio. This is yet another hindsight being 20/20 scenario.

Kids’ Dividend Portfolio Performance

As mentioned, we originally contributed $12,000 for the portfolio. $80 was used as commissions (we did two separate purchases). For now, we have no plans to put more money into this portfolio. This, of course, can change in the future.

Most of the stocks are showing a modest amount of profit with Visa more than doubled in stock price. Four stocks, Enbridge, General Mills, Qualcomm, and Shaw Communcation, have slight negative returns.

Book ValueCurrent ValueAnnual Rate of Return
$11,920.00$17,019.778.56%

In about 5 years, we saw a total return of 42.8% or about 8.56% annually. In comparison, VCN.TO had an annual rate of return of 5.29% in the past 5 years and VTI had an annual rate of return of 10.42% in the past 5 years. Since this dividend portfolio consists of both Canadian and US dividend paying stocks, we cannot just compare to one particular index. If we average the returns of VCN.TO and VTI over the past 5 years, the average rate of return was 7.855%. At 8.56%, we are slightly above the average 5 year return of the two ETFs.

Given that the long term data for stock market return points to 7%, including dividends, I think an 8.56% rate of return has been pretty decent.

But 5 years is not enough time to judge whether the stock picks are profitable or not. It would be interesting to compare the rate of return in 5, 10, and 15 years after we go through a few bull and bear markets.

Minor complaint with ShareOwner

In case you’re wondering, the reason that we opened the account with ShareOwner, rather than the likes of TD and Questrade, was because we could enroll in full DRIP with ShareOwner. This meant that all the dividends received could be fully re-invested to buy fractional shares.

Well… almost fully re-invested.

Dividends received have not been fully re-invested because of the 15% non-residence withholding tax for US dividend stocks and currency conversion fees.

Unlike Questrade, ShareOwner does not offer holding both USD and CAD in the same account. So whenever we receive dividends in USD, the amount is converted to CAD. When the amount is used to purchase fractional shares, ShareOwner then converts the amount into USD.

This has been my only minor complaint with ShareOwner as we have spent over $1,000 in foreign exchange fees (i.e. not very forex efficient, forex is only charged upon purchase). However, I do think it is important to build the portfolio with some US dividend stocks to provide some geographical diversifications. I truly believe the geographical diversification outweighs the forex fees.

Note: As a reader has pointed out in the comment section. The “exchange” amount that I see on ShareOwner as part of the US DRIP is not a forex fee. It’s simply part of the overall DRIP transaction. So the $1,000 that we’ve paid that was listed as “exchange fee” is simply part of the overall DRIP cost.

Dividend Income

Below are the amount of dividend income and YOY growth percentages since this portfolio was created.

YearDividend IncomeYoY Growth
201422.47N/A
2015379.561589.19%
2016419.8810.62%
2017459.419.41%
2018511.2511.28%

I was a little concerned with the below 10% YoY growth in 2017. Hence, it was nice to see the YoY growth to be above 10% in 2018. The annual dividend income totals listed above are the actual amount that we collected, excluding the 15% withholding tax and currency conversion fees.

Assuming no more cash is added to this portfolio and the dividend income is able to grow at 10% a year, this would mean that in 20 years, this dividend portfolio would generate almost $3,500 per year. The compounding and growth would continue and eventually generate over $23,000 per year in 40 years.

When both kids are a bit older, is it our goal to get them involved in tracking the dividends received. Once they start working part time, we plan to encourage them to add money in this portfolio to purchase more shares and increase the amount of passive income the portfolio can generate.

Once we become financially independent and our dividend income is much greater than our annual expenses, we probably will consider invest some of the extra dividends into kids’ dividend portfolio to help them grow their portfolio & dividend income.

Final Thoughts

I think it was a great idea that Mrs. T and I created a dividend portfolio for Baby T1.0 when he was less than 1-year-old. Gotta say thanks to Derek Foster as he suggested this idea in The Lazy Investor. It would have been great if we were able to create another dividend portfolio for Baby T2.0. But perhaps managing two portfolios on top of tracking and managing our own would have been too much work & effort.

Mrs. T and I believe the dividend income from kids’ dividend portfolio will become a great financial tool for both kids when they are young adults. As a parent, I believe it will be one of my responsibility to teach them to be financial responsible, so they don’t waste this powerful financial tool that we created for them.

Finally, in case you’re wondering, kids’ dividend portfolio was set up as an informal trust under my name, so I am currently paying taxes on dividends received. Luckily, dividend income is very tax efficient.

Written by Tawcan
Hi I’m Bob from Vancouver Canada, I am working toward joyful life and financial independence through frugal living, dividend investing, passive income generation, life balance, and self-improvement. This blog is my way to chronicle my journey and share my stories and thoughts along the way. Stay in touch on Facebook and Twitter. Or sign up via Newsletter