While I don’t expect my daughter to become a stock-picking fanatic like me, I’ve enjoyed building a portfolio with her that is full of simple(ish) businesses that any elementary-aged kid might appreciate. Typically, we try to prioritize buying a new stock each year and have developed a portfolio that consists primarily of the following holdings:
A mixture of products she likes, understandable businesses, and brands she sees everywhere, these stocks present an easy way for me to point out just how many companies we come across in our daily lives.
Now, with the market continuing to tiptoe around “correction” territory, it’s as good a time as any to add to a couple of these stocks (and my daughter’s longest-held position) while they’re down between 19% and 48%. Here’s what makes these dividend stocks magnificent buys for any kid’s portfolio.
Image source: Getty Images.
While railroads are complex operators thanks to their labyrinthine nature, I’d argue they’re also excellent investments for kids. First, they’re easy to spot “in the wild,” making them an easy on-ramp to talking about stocks or investing.
Furthermore, their business models are simple to grasp. Someone in this city wants stuff from that town over there, and they will move it there for the right price.
As for why we chose Union Pacific, it is the leading railroad operator around our neck of the woods, and it is very common to see. Equally important, however, is that Union Pacific’s return on invested capital (ROIC) remains best in class versus its peers.
This metric tells me that Union Pacific is the best at generating returns from the capital it deploys on new projects. Whether it builds siding extensions to accommodate longer trains, adds new mainlines, or upgrades terminals to allow for new capabilities such as intermodal container handling, the company produces outsize profits from these add-ons.
Best yet for my daughter, Union Pacific has raised its dividend for 18 years in a row, growing its payouts by 17% annually over the last decade. Currently, its 2.4% yield is well above its 10-year averages, yet only uses 48% of the company’s net income, so there is plenty of room for continued increases. In addition to these dividends, Union Pacific has been repurchasing its shares hand over fist, lowering its total share count by 31% since 2015.
Operating in a virtual duopoly with BNSF Railway in the western two-thirds of the United States, Union Pacific benefits from a powerful geographic moat that should keep providing strong returns in my daughter’s portfolio for years to come. With tariff turbulence helping Union Pacific’s price to tumble 22% from its highs, now looks like the perfect time to buy the steady stock.
Though specialty excess and surplus insurer Kinsale Capital(NYSE: KNSL) isn’t one of my daughter’s “core” holdings listed above, it is one of her oldest. The company popped up on my radar a few years ago, and I bought the best-in-class insurer for my daughter. It has been a four-bagger since.
Since I was planning for her to hold the company for at least 15 years until she might need the money in adulthood, I wanted a growth stock with dividend growth potential, and Kinsale fit the bill to perfection. Over the last five years, Kinsale’s revenue has more than quadrupled, while its dividend payments have grown every year, nearly doubling over the same time.
While CEO and founder Michael Kehoe has stated on numerous earnings calls that this blistering growth rate won’t persist forever (it’s merely capitalizing on a booming market), Kinsale remains a top growth stock. Focused on insuring unusual niches like gun ranges, homeless shelters, and axe-throwing venues, Kinsale thrives in areas where other insurers won’t go.
The company keeps its underwriting and claims management processes in-house, which has created a data-powered flywheel that makes Kinsale a more efficient insurer for each new quote it offers. Powered by this process, Kinsale’s combined ratio of 82% remains one of the best out there — even in a quarter impacted by the Palisades wildfires.
With the company’s share price down 18%, thanks in part to these fires and a “normalization” from the peak pricing environment Kinsale enjoyed for years, it looks like a great time to “add up” on this winning investment.
Image source: Getty Images.
The investment thesis on this one is pretty simple: My daughter loves pools, Pool Corp. is the best-in-class pool equipment distributor, and it is a magnificent dividend growth stock. While Pool Corp. links directly to the notoriously cyclical U.S. housing market, the company has been a 78-bagger since the turn of the century.
Currently, however, this cyclicality is working against the company as evidenced by its declining sales in each of the last nine quarters. With new home builds in the U.S. down and new pool starts tied closely to this metric, Pool Corp. is left waiting for sunnier days.
Now down 48% from its all-time highs — but with my daughter likely to hold the company for 10 more years — Pool Corp. looks like an intriguing turnaround investment right now. Though a turnaround may not be imminent, viewing things through a decades-long lens should give us an advantage, as we don’t really need an imminent turnaround.
Furthermore, the company isn’t at risk of failing anytime soon. Generating 62% of its sales from non-discretionary maintenance products and an additional 24% from semi-discretionary replacement and remodeling items, Pool Corp. should weather these downtimes profitably.
Best yet for my daughter, the company will likely reward her for her patience. Currently paying a 1.6% dividend yield that is near all-time highs, Pool Corp. has raised its payments for 14 years straight while delivering a growth rate of 17% over the last decade.
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Josh Kohn-Lindquist has positions in Adidas Ag, Casey’s General Stores, Chipotle Mexican Grill, Coca-Cola, Hershey, Idexx Laboratories, Kinsale Capital Group, O’Reilly Automotive, Pool, and Union Pacific. The Motley Fool has positions in and recommends Canadian Pacific Kansas City, Chipotle Mexican Grill, Hershey, Kinsale Capital Group, and Union Pacific. The Motley Fool recommends Canadian National Railway, Casey’s General Stores, and Idexx Laboratories and recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
