"I've used stone picks from "Picks & Stones" that are very good. I've used others that kind take the brightness away from the guitar. I prefer the stone picks with a roughened end, so that you can hang on."
I teach the 5-7 y/o's ukulele. It's very fun for them and is the perfect path toward the guitar. The guitar can be a little much for children that age. It can work, but there would have to be very short 15-20 minute lessons done one on one.
The ukulele is very easy to hold and manipulate with little fingers that are just learning fine motor skills (i.e. holding pencils and writing). Teach 4-5 chords: C C7 F Am G7. These are the beginning chords that are really simple and there are a boatload of children's songs you can do with them. To teach rhythm, have her clap out the rhythm and then strum. Don't worry about getting perfect strumming - the uke can be strummed with the thumb, one finger, the backs of 2-3 fingernails, or a nice big felt pick. The idea is to just get the child to feel the rhythm and enjoy the music. The ukulele is one of the coolest instruments to introduce total fun with music and singing. Most of the parents in my classes end up learning how to play just from helping their little ones practice -- it's that easy and that fun!
With the chord progression C to G7 to C I teach the concept of guide fingers. And with the progression of Am to F to G7, I teach the concept of shared or pivot fingers. And the seed is planted for classical guitar playing.
My favorite brand of ukulele is the Lanikai standard or concert. These are inexpensive and hold their tuning. They have been dropped, sat on, and banged and hold up well. :)
Welcome to the Newb group, Steve. It's always great to have more experienced players in the group, and we all learn a lot from each other. I'm listening to your music as I type this, and it sounds really good. As for your discussion question (Teaching a child...), I'll be surprised if you don't get a good post from Donna Zitzelberger. She specializes in teaching children. If she doesn't post, you could go to her page and ask her in a comment. Leanne Regalla is also a teacher, and I see she is one of your Friends. She may have some good ideas too.
I'm curious about the guitar in picture 4/6 on the far left, next to the Deering Goodtime banjo. I seem to recall seeing those in an old magazine - not sure which one. I have some dating back to the late '70's.