Northern Spain and Portugal itinerary with two young kids

You should be aware that you will probably get dinged with a substantial fee for picking up your rental car in one country (Spain) and returning it in another (Portugal). You should check with the rental agency to find out just how bad the sticker shock would be.

I would heartily recommend staying a night in the Parador Fuente Dé in the Picos de Europa - take the cable car to the top of the mountain for fantastic views and visit Centro de Interpretacion de Los Picos which tells the story of the area. It’s located on rte. N-61, the road from the coast to the Parador. I would then visit Santiago de Compostela for 2 nights. From there either head to the eastern end of the Duoro wine region or to Porto.

We went in the reverse direction. One of our favorites was Baiona where we stayed in the sea front Parador. A replica of Columbus’ ship “ Pinta” was moored there when we visited as Baiona was where it returned from the Americas.

Thanks for your suggestions everyone. I have to ask though what is Parador? I've read about this place before on this forum, but can't seem to find any information about it. Is it a town, a hotel, an area?

There is indeed so much between SS and Porto (fwiw, I was in this area this past summer with our 3 kids). SS was great for the balance of adult and kid interests. Short hikes, culture, walkability, and the beach when needed. Heading west, the Picos are fun, esp. for your kids' ages, they would like the cable car ride into the mountains in Fuente De. Be aware that the wait for tickets can be long (I believe the time between buying our tickets and getting on the cable car was 2 hours. There is a cafeteria and a gelato hut, and a field of cows to walk among, so the 2 hours went by quickly, but still, we didn't budget our time for that). The cable car ride is fun and it takes you up to a high point in the mountains where you can peer over a windy railing, and/or walk as short or far along several roads leading around the peaks. I would stay in Potes and not Fuente De, simply to have something to do in the afternoon/evening, even if its just walking around. I don't think Potes is worth more than 1 night. We didn't spend the night there (not because it is not charming, but because there isn't much to do that would require more than a full day). We drove from there to Congas De Onis, on the western side of the Picos, where we stayed two nights. On our full day there we drove up into the mountains (20 minutes?) and walked around the Basilica, and then took the [required] bus up to the lakes and walked around there for a bit. They are Swiss Alps lovely, and the walking is short (7-10 yo length). Then we went into Congas de Onis proper and walked around, ate dinner, and departed the next day. This made for a lot more driving, but you could spend one night in Potes, and then the next 2 in C de O, and have 3 days in the Picos. From Congas you could drive to Leon and spend one night and visit the Cathedral there, which was the most stunning we have seen almost anywhere (better than Notre Dame we thought). From Leon, you could head to Porto.
The challenge with visiting the Picos is that its more off-the-beaten trail than staying on main roads next to the coast (or otherwise). The driving is a little longer simply because its mountain driving. Then again, as you say, you'll be on the coast a lot.

I have to ask though what is Parador? I've read about this place before on this forum, but can't seem to find any information about it. Is it a town, a hotel, an area?

Paradores are an upscale hotel chain run by the Spanish Gov., they are either in a unique or historical location (or both) like in a castle or monastery. In the case of Parador Fuente Dé, which I have stayed and would also recommend, it is a cozy mountain lodge deep in the Picos de Europa. The views from the hotel are stunning, a sheer rocky valley surrounds the Parador, with wild horses grazing in the pasture below and sheep/bulls in the high mountains meadows above (and maybe even a bear or two). From ParadorFuente Dé one can take a cable car up to the top of the mountains for easy access to some of the best hiking trails in the Picos de Europa National Park. I'd recommend at least 2 nights at Fuente Dé.

There was quite a line for the lift at Fuente De on the day I visited it back in 2016, too.

Potes is a screamingly picturesque (though touristy) old stone town.

@acraven - another good thing about staying at the Parador de Funete De is that you are right next to the cable car, so you can get in early before the line really starts : )

Very good point. I arrived on a bus tour from Santander. The guide hotfooted it to the ticket booth, then we waited quite a long time (at least we didn't have to stand in line).

One other thing: There were patches of unmelted snow on the ground in July. It's quite cold up at the top. Dress appropriately.