Long-Term Investing for Minors: High-Dividend Stocks & Preferred Shares

The Lunar New Year holiday has ended, and wallets are fuller with sebaetdon (gift money). Parents are facing a familiar dilemma: give the money to their children, knowing it will likely be quickly spent, or deposit it in a bank account where it may not keep pace with inflation? For those looking to build long-term wealth, the stock market offers a potential solution, but choosing the right investments can be daunting.

A key consideration for investing in a child’s account is high-dividend stocks. The core principle should be long-term investment. To comfortably buy and hold for a decade or more, it’s prudent to focus on established companies with a track record of increasing profits and growing dividends. Chasing solely after high dividend yields can be risky. A yield of 10% or more may seem attractive, but if it’s driven by a declining industry or one-time gains, the stock price could fall, resulting in a loss of principal.

preferred stock of major South Korean corporations presents a compelling option. Recent market rallies have widened the price gap (valuation discrepancy) between common and preferred shares. This increased gap translates to greater dividend appeal, and as the price difference narrows over the long term, these established companies offer attractive growth potential.

Samsung Electronics and Hyundai Motor are prime examples. As of February 13th, Samsung Electronics traded at 181,200 won, while Samsung Electronics preferred shares were priced at 127,600 won – a roughly 30% difference, enhancing their dividend attractiveness. Samsung Electronics has recently increased its dividend for preferred shares by 1 won per quarter. Last year’s quarterly dividend was 566 won for common stock and 567 won for preferred stock. Based on those prices, the dividend yield for common stock was 0.5%, and for preferred stock, 0.7%.

Hyundai Motor follows a similar pattern. While common stock trades around 500,000 won, Hyundai Motor 2B preferred shares closed at 263,000 won on February 13th. The price is half that of the common stock, but the dividend is 2% higher based on par value (5,000 won). If the price difference persists, the dividend yield difference could double. This allows investors to accumulate more shares with the same amount of capital and receive a higher dividend income, making it an attractive option for long-term compounding.

Traditional high-dividend financial stocks can also strengthen a child’s portfolio. Recent trends toward increased shareholder returns in the financial sector are boosting dividend expectations. Several domestic high-dividend exchange-traded funds (ETFs) are already building portfolios centered around major financial holding companies, securities firms, and insurance companies. Last year, the dividend payout ratio (percentage of net income distributed as dividends) was 27% for KB Financial Group, 25.1% for Shinhan Financial Group, 27.9% for Hana Financial Group, and 31.8% for Woori Financial Group. Samsung Life and Samsung Fire & Marine Insurance, along with securities companies benefiting from the recent market rally, are also attracting attention for their high shareholder return policies.

If individual stock volatility is a concern, ETFs offer a diversified alternative. The ‘KODEX High Dividend’ ETF has a one-year distribution (dividend) yield of 3.49% and a total return of 87%. Real estate investment trusts (REITs), which invest in real estate and infrastructure, are another option. The ‘TIGER REITs Real Estate Infrastructure’ ETF has a one-year distribution yield of 8.78%, and a one-year total return of 20.2%. However, its three-year return is relatively lower at 6.08%. A securities analyst noted that high-dividend stock investment should be approached from a ‘total return’ perspective, reinvesting consistent dividend income to grow assets over time.

Investing in a child’s account is a long-term endeavor. Prioritizing companies with a history of consistent profitability and dividend growth, such as those offering preferred shares, can provide a solid foundation for building generational wealth. Diversification through ETFs can further mitigate risk, while a focus on total return – reinvesting dividends to capitalize on compounding – is key to maximizing long-term gains.