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5 stocks to buy for your toddler today

If you wanted to set money aside for your young child, what would you do with it? One legitimate choice would be to put it in a bank account. However the money would probably be worth a lot more if you used it to buy some well-chosen shares.

I’ve put together a list of five stocks that I believe will easily outperform the market over 20 years, and that are currently trading at attractive prices. I’ve also tried to choose stocks that will contribute to a healthier, happier society because what we invest in now shapes the world today’s toddler will grow up in.

1. Cochlear (ASX: COH)

Cochlear is the only big company on this list, and it belongs here because it is an excellent business that is currently having difficulties. Earnings dropped considerably in FY 2013, and many people believe that Cochlear will have to drop the price of its hearing aids in order to retain market share.

I’m not sure whether this is the case or not, but even if it is, Cochlear’s hearing aids will remain in demand. The company sells into plenty of markets that have an aging population, and with age comes hearing loss. Furthermore, the company won’t be ruined if its large margins reduce slightly, and it is about to launch its latest device.

2. Fiducian Portfolio Services (ASX: FPS)

Fiducian is a micro-cap boutique fund manager that is currently available at a particularly attractive price. The firm continued to pay dividends throughout the GFC, and over 80% of its funds under management come from the clients of its adviser network. Furthermore, revenue from financial advisers amounts to around 25% of total revenue. While management fees make or break the company, I think that the association with financial advisers (and separate revenue stream) will serve the company well over the long term.

3. Servcorp (ASX: SRV)

Servcorp leases high-quality serviced offices in premier locations all around the world. Significant capital investment in new floors is about to pay off over FY 2014 and FY 2015, barring macroeconomic mishaps. Motley Fool contributor Peter Andersen recently covered the company in this excellent article. The directors have said they intend to pay a dividend of 18c in FY 2014. This amounts to a dividend yield of 4.5% at the current price of $4, although it may only be partially franked.

4. 1300 Smiles (ASX: ONT)

1300 Smiles is an innovative company that owns and supports dental practices. The company’s mission is to make dental care more affordable for patients, and easier for dentists. It even provides interest-free finance and discounts for members of its Improving Smiles program. The company trades on a trailing dividend yield of just under 3% at the current price of $6.50. FY 2014 is likely to be a year of consolidation as the dental industry adjusts to the withdrawal of the Chronic Dental Disease Scheme, but I think 1300 Smiles will excel in the long term.

5. IMF (ASX: IMF)

IMF is a litigation funder that has operated in Australia since 2001. The company has expanded into the USA, a strategy not without risks, and recently raised $42 million at $1.70 per share. IMF’s profits are necessarily quite lumpy, and earnings were strongly down in FY 2013. The company reported a case pipeline worth more than $1.6 billion.

IMF won’t win all its cases, and it has to pay expensive lawyers’ fees to fight them. However, it is well managed and I believe that the share price is attractive at $1.75. The risk of capital loss is minimal, and the company has a history of paying dividends.

Foolish takeaway

These five companies aren’t just good investments, they also perform important functions in society. Cochlear helps people hear, and IMF allows ordinary people (with no money) to sue big corporations, facilitating justice. Fiducian places an emphasis on the integrity of its financial advisers (unlike some other companies) and Servcorp gives to charity (although it could give more).

Best of all, 1300 Smiles is driving down the cost of dental care, and supports YWAM Medical Ships Australia, bringing health services to Papua New Guinea. I believe these factors make it more likely that these companies will still be around in 20 years. It’s in our interest that they are.

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