Here’s how to help kids invest

Here’s some irony for you: Kids stand to benefit the most from investing, but they can’t have brokerage accounts of their own. Don’t fret, though. You can get around that obstacle.

Consider a trust fund, if you can afford it. You’ll have to manage it yourself or pay someone to do so. It eventually becomes the property of your child, but he or she can’t take control of it until reaching an age you specify.

Stocks bought for youngsters are frequently set up in Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) accounts. The investments belong to them, but they can’t take control of them until early adulthood. Until then, the custodian (probably you) controls the money for their benefit.

You can also open a simple joint brokerage account, which you control until the child becomes an adult. Note that whoever’s Social Security number is on the account will face taxes on any gains. Since your children are probably in a lower tax bracket, their numbers might be the best ones to use. Learn more about such tax issues at www.fool.com/taxes and www.fairmark.com/custacct.

A great way to get kids started is through Dividend Reinvestment Plans (and Direct Stock Purchase plans). They allow you to buy small amounts of stock at a time, directly from the company, bypassing brokers. Just ask a company you’re interested in if it offers such plans. Before opening an account, learn more about these plans at www.directinvesting.com and www.fool.com/School/ DRIPs.htm

Informal arrangements can work, too. If you own stock in McDonald’s, you can “sell” your son a few shares. If you’re buying 50 shares of Wal-Mart and your daughter wants to buy some, you can combine orders and buy 51 or 52 shares. Just keep track of which shares belong to whom. Once your kids become adults, they can open their own brokerage accounts and you can transfer their shares.

Teach your kids about money with “The Motley Fool Investment Guide for Teens” by David and Tom Gardner with Selena Maranjian (Fireside, $14) or point them to www.Fool.com/teens.

Ask the Fool

Q: I’ve held stock in Microsoft and Starbucks for a few years now. Microsoft has paid me some dividends, but Starbucks hasn’t. Would I be better off selling both and putting the proceeds into CDs? Microsoft seems on the decline, and I have little faith in CEO Steve Ballmer. — C.R., St. Paul, Minn.

A: You shouldn’t necessarily sell a stock simply because it pays little or no dividend. There are two main ways to make money in stocks — via dividends and stock price appreciation. A company may pay no dividend (often because it’s still growing rapidly and wants to use its excess cash to reinvest in the business), but its stock price might increase substantially over time, if it’s executing its strategies well.

Meanwhile, selling is smart if you have low expectations for a company’s future or have little faith in its management. Opinions differ on Microsoft, though. Some think the release of its new operating system, Windows Vista, bodes well, while others find greener pastures elsewhere.

Q: Should original stock certificates be kept by owners in their bank deposit boxes, or should the owners have the company keep them for them? — I.R., via e-mail

A: A routine practice today is for brokerages to hold the certificates for investors — registering the shares in “street name.” Doing so has several advantages. For one thing, you don’t have to safeguard the papers and you won’t lose them. Also, whenever you want to sell, you don’t have to mail them back to the brokerage, which can take several days. Online or by phone, you can sell your shares within minutes. Learn more about brokerages at www.broker.fool.com.

My smartest investment

In 1979, I married a handsome firefighter. We each had three children, so I gave up being a Realtor to stay at home. With six educations looming, we bought seven houses that had been foreclosed. The rents more than paid them off, and they’re now worth $1.5 million. The six kids all have bachelor’s degrees, one has a master’s, one is a multimillionaire, and we have eight grandchildren. We are 58 and 67 and very happily retired. — G.C., Medford, Ore.

The Fool Responds: Congratulations on a life well lived so far! Investing in real estate can pay off well, but it’s not a sure thing. It can help if you’re good at maintaining and repairing homes, and you should be ready for some legal fights when tenants do damage or don’t pay. Property values can fall, too, especially over the short term. Learn more in “The No-Nonsense Real Estate Investor’s Kit” by Thomas Lucier (Wiley, $20).