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Investing for Your Newborn’s Future

baby There is no doubt about it. There is plenty of planning and preparation to do before and once you have a new baby. It is easy in all the excitement of having a new baby to push aside financial planning. But when faced with a sleepless night (in this case, perhaps due to a new baby), some may worry about their child’s financial future. So when one of our readers recently asked us a question about financial planning for their child, we thought it was a great question for us to answer here.

Specifically, the reader asked:

“Would it be good to purchase a scrip dividend scheme share (i.e. 1 of the local banks) for a newborn and hold it till the baby turns 18/21?”

A scrip dividend scheme is where shareholders are entitled to the option of receiving their dividends in the form of shares instead of cash, when dividends are declared. However, the scrip option may not be available every time a dividend is declared. It is up to the company’s discretion to offer scrip or solely cash.

On the company’s front, such a scheme allows the company to conserve cash for its daily business operations and on the shareholder’s front, it allows him/her to own more shares of the company, without paying any brokerage fees and at a slight discount to market price. There are many other advantages and disadvantages.

In Singapore, our public-listed banks, namely DBS Group Holdings Limited (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39) and United Overseas Bank Limited (SGX: U11) have all offered the scrip option previously. It must be noted that the scrip option was not available for every single dividend declared throughout the years for all the banks. For some years, the scrip option was unavailable. To see when the scrip option was available, readers can refer to the individual sites of the banks respectively here, here and here. For example, OCBC did not offer the scrip option for the whole year of 2012.

In order to consider if one should purchase a scrip dividend for your child, you should ask yourself the following questions:

  • Am I comfortable with the scrip dividend scheme not being available all the time?
  • Am I confident that the bank (or any company for that matter) will continue to operate and do better than it is doing now, 20 – 25 years into the future?
  • Do I believe in the business and understand how the business works?
  • Is the company undervalued or at least fairly valued when taking up the scrip option?

The above questions can be asked for any company offering the scrip dividend scheme. Spending some time to contemplate on the above questions will help you make an informed decision.

You must also be comfortable with investing more into the company when the stock price dips, especially during an economic recession. On average, a recession occurs once every 4.7 years, according to National Bureau of Economic Research. 20 years into the future is a long time and there could possibly be an average of four to five market crashes.

Besides investing in a scrip dividend, another alternative to save for your newborn’s future is to look into investing in the STI ETF (SGX: ES3). STI ETF is an exchange-traded fund (ETF) that tracks the Straits Times Index (SGX: ^STI) and with the single ETF, you can own all the 30 companies represented in the STI. Including dividends, the STI ETF has delivered returns of around 10% compounded annually for the past 10 years. If you invest $12,000 every year for a total of 18 years at 8% per annum (using a more conservative return), you would amass a total of $449,402 at the end of the 18th year.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.