We want our kids to have a better life than ours. But even though rising college costs and mounting student loan debt make the situation look bleak, don't let a dire situation paralyze prudent planning. The best solution is to get started right away and let the power of compounding growth work for you.
Later in this article, I'll discuss five stocks to help you build a solid foundation for your child's college savings, but let's first address why waiting to get started is costing you more than you think.
Start early, spend less, enjoy more
In a previous article, I explained the current costs of college. For parents of a newborn, a hypothetical $15,000 annual price tag for college -- in today's dollars -- requires $300 per month in an investment making 8% annually. But by waiting five years to start saving, you'll need to fork over $537 per month -- almost 80% more.
Think of it this way: The $14,000 you save by starting early could overhaul your kitchen's avocado-colored countertops and outdated motif, pay down debt, or fund years' worth of family vacations.
I wanted to focus on companies characterized by simple business models, a stable history, and incredible brand strength. Let's take a look at five companies that exhibit these traits and beg for consideration for your kids' college savings.
Undoubtedly, Starbucks has a great product and a strong brand -- main reasons why millions of customers wait in long lines for customized beverages. So why not commission your daily $4 caramel macchiato habit to add to both your need for caffeine and your kid's college piggy bank?
Last year, Starbucks revenues grew 9%, and net income grew 31%. Starbucks boasts solid returns on investment and is expected to grow earnings by nearly 20% per year over the next five years.
Starbucks' growth initiatives include the recently announced $100 million acquisition of San Francisco bakery retailer La Boulange and a deal with Coinstar, which will sell the Seattle brew in vending machines across the country. While the initial hit to the balance sheet could sting, this may pay off nicely for long-term investors.
You may not like your kids drinking sugary soft drinks, but millions of people reach for a Coke every day. Coca-Cola has been labeled Interbrand's "Best Global Brand" every single year since 2001. The company enjoys exceptional margins and continues to increase sales growth. Its 2.8% dividend yield is a sweet bonus for shareholders.
New York City Mayor Michael Bloomberg's recent denouncement of sodas won't be the end for soft drinks. The cigarette industry faced similar pressures in the mid-1990s when it was forced to pay states billions of dollars to fund anti-smoking initiatives and pull marketing campaigns. The result? Tobacco stocks hardly budged. In fact, shares of Altria soared nearly 290% from 1995 through 2005, while the S&P 500 was up 165%.
Next Christmas when you sneak Jimmy's Hot Wheels under the tree, know that your money is going to a company you own. Mattel boasts monster margins compared with those of competitors and the industry. Even though the company experienced a rough patch with the loss of Sesame Street to Hasbro, Mattel appears attractively valued; it sells at 12 times forward earnings versus 17 for the industry and pays an enticing 4.1% dividend yield.
Mickey's empire includes theme parks, television, movies, and an amazing brand. Disney's return on assets and return on investment are twice the industry average. Sales growth is expected to double over the next five years versus the prior five. Disney recently announced it will place restrictions on advertising junk food on its child-focused television channels, radio stations, and websites. Several of our analysts feel this may prove good for the company's top and bottom lines.
While cleaning up after your bundles of joy is surely no small feat, Clorox undoubtedly eases the dirty work. And the 100-year-old company cleans up nicely with a maximum five-star rating from our CAPS community. It pays an impressive 3.7% dividend yield, and sales growth is expected to double over the next five years versus the prior five.
Take a look at how these stocks performed in the past 18 years -- a time when your newborn could have grown to a college freshman.
Sources: Yahoo! Finance, The Motley Fool. Percentage represents change from June 4, 1994, to June 4, 2012, including dividend reinvestment.
From 1994 to 2012, a portfolio invested in equal portions of these five stocks -- with dividends reinvested -- returned 854%, or an average 13.3% annually. That means a $10,000 wad would equal $95,400 today. Exchange-traded fund SPDR S&P 500, a proxy for the S&P 500, returned 188% in that time, which would produce just $28,800 today from a $10,000 investment back then.
Start building for your kiddo's future
Consider these five companies for your child's college savings, either as a portfolio of five stocks or just one or two of them. If I had to pick just one right now, I'd go with Clorox. I like its dividend, growth prospects, and solid brands.
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