If you want to open a Junior ISA, known as a JISA, the number of investing options available to you can be totally overwhelming.
Funds, shares, bonds, gold, what’s best? Should you buy FTSE 100 household names like Shell or Tesco? Or plump for lesser-known growth stocks on the FTSE 250?
Mums and dads being furloughed — along with no school — has made for some fairly tense home situations. Yes, these truly are strange and difficult times. Furnishing your little ones with a JISA might be the last thing on your mind.
But a JISA can make the most of the greatest invention the world has ever devised. Einstein named it the eighth wonder of the world for good reason. This slice of genius is called compound interest.
We’d all like to make our son or daughter rich. But every good investor should follow Warren Buffett’s number one principle: don’t lose money. Because funds contain far more than a handful of individual shares, they are often less volatile. That means prices don’t tend to swing wildly back and forth. And funds are often just easier to deal with.
SSGA SPDR ETFs Europe (LSE:UKDV) — better known by the ticker symbol UKDV — holds shares in 41 different FTSE 100 companies that are called ‘dividend aristocrats’. These are the top best-paying dividend shares in the FTSE 100.
Hold shares in this fund and you’ll be paid a 5% dividend into your JISA, twice every year.
Among the top companies held by the UKDV fund are renewable wind farm operator SSE, water utility giant Pennon Group, pharmaceutical company GlaxoSmithKline, and popular financial services company Legal & General.
The fund managers do all the calculations for you, which is good, and will even move certain shares in and out of the fund if they are underperforming.
You’ll pay a small management fee of 0.3% to hold this fund in a JISA. Reinvest your dividends — there’ll be a tickbox option in your JISA settings — and you can buy up more shares in the fund at no extra cost. This is where Einstein’s magic happens. Reinvesting dividends equals compound interest.
Each year you can put up to £9,000 into a JISA, tax free. Those last two words are extremely important. It means any capital gains (from share price rises) or dividends (paid out by companies from profits) are entirely free from tax in the JISA.
Family and friends are also allowed to contribute to a JISA, if you want to steer your kids away from birthday presents of soon-discarded Nintendo Switch games or the latest trainers.
You can open a JISA when your child is at any age. Add the maximum each year and in five years’ time you’ll have a very healthy £45,000. But use Einstein’s eighth wonder of the world and my suggestions of a 5% dividend fund, with the dividends reinvested? That £45,000 has just turned into £60,788.
Just imagine what you could do if you leave it till they are 18?
Even at small contributions, the amounts you can add from dividend investing are quite staggering. Say you can only start with £100 a month. Leave it long enough — 18 years would do it — and if the rates remain relatively constant, you’d come away with a JISA worth £31,713.
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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.