Minting a Child Millionaire Step 3: The Only Investment You Need to Purchase

 

So having followed step 1 and step 2, you now have a discount brokerage account open for your Child Millionaire portfolio and you’ve set-up an automatic monthly deposit for any child benefit or equivalent amount (£87.97 / $140 US or CDN per month) saved by axing the morning lattes. So cash will now start accumulating in the account each and every month.

 

We’ve now reached the crux of the issue. What investment(s) should you purchase to build a hands-off, automated Child Millionaire portfolio?

 

In The Child Millionaire I devote quite a lot of time to this question. There are basically two options. The first is to buy shares in individual companies, specifically Dividend Aristocrats. These are companies that shell out profits to shareholders in the form of dividends, and most crucially, they have a track record of raising the dividend each and every year for at least 25 years.

 

The second option, which is the one I’m advocating for this lazy person’s automated Child Millionaire portfolio, is to purchase an Exchange Traded Fund (ETF) comprised of Dividend Aristocrats.

 

ETFs are funds that pool the money of many thousands of individual and institutional investors. ETFs trade on the large stock exchanges just like a regular stock, so they can be bought and sold in seconds at low commission rates and they are highly liquid.

 

Although they pool money, ETFs are designed to track various sectors, investment themes or entire stock market indices, and thus there is little, if any, human stock-picking prowess or folly involved.

 

ETF do this by automatically purchasing a selection and proportion of stocks that matches those tracked by a given index such as the FTSE 100 or S&P 500. Thus the cost of running an ETF is very low because there is little research, work and management compared to an ‘actively managed’ mutual or unit trust fund. This low cost is reflected in the very low annual management fees, referred to as ‘Total Expense Ratio’ or ‘TER’, which are generally 0.2–0.65% per annum.

 

So what we want to do is choose one single ETF that does the job, buy it, reinvest the dividends and forget it.

 

So what to buy?

 

Not surprisingly, most Dividend Aristocrats are American companies and trade on US stock exchanges so the best ETFs are US-listed. However if UK or Canadian residents buy US-based ETFs (or shares) they lose 30% of any dividend to US withholding tax. This can be reduced to 15% by submitting a W-8BEN form to your brokerage. Either way the withholding tax will reduce your overall return but it might be worth it to access US markets.

 

However, if this smacks of effort then it’s ok to use a domestic ETF that does more or less the same job. Here are good ones to buy, follow the links to read the details. Note that I receive no compensation for mentioning these ETFs.

 

US residents

 

SPDR S&P Dividend ETF (SDY)

 

This ETF owns shares in all of the companies comprising the S&P Dividend Aristocrat index.

 

UK residents

 

iShare FTSE UK Dividend Plus (IUKD)

 

Trades on the London Stock Exchange (LSE) and tracks an index of the highest yielding companies on the LSE. Most aren’t technically ‘Dividend Aristocrats’ but this is the best you can do in the UK.

 

Or

 

iShares S&P 500 (IUSA)

 

Trades on the LSE but owns shares in the 500 companies comprising the US S&P 500 Index. Here you get the dividend aristocrats along with a few hundred others that aren’t so aristocratic. As this trades in London there is no need to pay attention to withholding tax issues as they are handled by the ETF internally.

 

Alternatively you could purchase the US ETF above, complete a W-8BEN form and accept the fact that 15% of you dividends will be withheld by US Internal Revenue Service

 

Canadian residents

 

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CUD)

 

Trades on the Toronto Stock Exchange (TSX) and owns shares in all of the companies comprising the Canadian Dividend Aristocrat Index. As there isn’t as much depth of companies in Canada the bar is lower than the US Divided Aristocrats but it’s still pretty solid.

 

Or

 

S&P US Dividend Growers Index Fund (CAD-Hedged) (CUD)

 

Trades on the TSX and owns the shares in the US Divided Aristocrat Index. A good option for Canadians who want to own the top dividend payers in the US.

 

Action

 

Choose one ETF depending on where you live, that will comprise your Child Millionaire portfolio.

 

Next: Minting a Child Millionaire Step 4: How to Buy an ETF Investment and Mint a Child Millionaire

 

Return to:

Minting a Child Millionaire in 2013 Step-by-Step Series Overview

Step 1: Open an Investment Account with a Discount Broker

Step 2: (Near) Painless Funding the Child Millionaire Portfolio

 

Disclosure,  I own units in:

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CUD)

S&P US Dividend Growers Index Fund (CAD-Hedged) (CUD)

 

2 thoughts on “Minting a Child Millionaire Step 3: The Only Investment You Need to Purchase”

  1. I’ve been signed up for the DRIP program but money is still building up in my investments accounts for 2 reasons (which is generally a good thing) :) One is certain stocks aren’t eligible for the DRIP program and two is when you get paid a dividend but it’s not enough buy more stock so they put the money in the account.

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    1. Good points. There are two issues, one is whether a stock/share has a dividend reinvestment plan/program (DRIP). Many do but often those that don’t are still eligible for a synthetic DRIP through your brokerage account. There is sometimes a small commission charge for DRIP purchases. MY TD Direct Investing account in the UK charges 1.50 GBP per DRIP, but my Canadian TD Waterhouse account does it for free. The second issue is whether you have a large enough holding of a given stock/share, and the price of that share is low enough that your dividend will actually buy at least one share to enable compounding. When investing small but regular amounts this can be tough but if you only have a small portfolio that you contribute to monthly then it is worth purchasing only a single Dividend Aristocrat ETF for the portfolio, not individual shares, so you are diversified and so that your holding grows as quickly as possible to reach the point when the dividend is large enough to start to buy more units. In the UK, many shares only pay a dividend every 6 months so you get larger but fewer payments which makes DRIPing easier and cheaper.

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