7 Stocks for Your College Savings

Every year, families scrape and claw in order to come up with the vast amount of money that they need in order to send their children to college. Saving for higher education is arguably one of the most stressful and demanding tasks that parents have to undertake, and unfortunately, more and more people are making enormous mistakes along the way.

The decline of the 529 plan
529 plans are similar to IRAs, in that they offer tax-deferred growth on your investments. Money inside the 529 doesn't get taxed while it grows over the years. Eventually, when you withdraw the money to pay for your children's education, the income all those investments has generated won't get taxed, either -- a tremendous benefit for any family that has been prudently saving during their children's lifetime.

However, since the financial crash of 2008, the 529 has become less and less popular among parents. Sure, the volatility we saw in the market has had a psychological effect on investors, but in addition, we've also experienced a decade of flat growth in stocks, which has many people questioning the long-held assumption that buy-and-hold investing is the best way to produce gains on your money. Lastly, high costs and few options in 529s have turned investors off.

In fact, a recent report by the Financial Research Corporation disclosed some very disturbing trends:

  • Only 324,000 new accounts have been opened so far this year -- that's less than half the amount that was opened last year.
  • The average monthly contribution during the second quarter of this year was \•05, down 21% from the same period last year.
  • At least 50% of parents saving for college are now looking more and more toward savings accounts and CDs (according to Sallie Mae).

Don't make this mistake
Hopefully,  the majority of people reading this article don't fall into the last category of savers. But if you do, let me offer some humble advice.

If you have a 529, but are tired of the limited choices they offer -- your investment options are typically very restrictive -- then don't rely solely on them. Use what options your 529 does offer to put together a basic core portfolio, one which includes growth investments like stocks and conservative ones like bonds or CDs.

But don't stop there. Instead of putting everything in the 529, set some money aside in a separate brokerage account, and earmark it for your children's future.

If you're fearful that you may lose your shirt on some fly by-night investment, look to dividend-paying stocks. They will provide more yield than your average CD or savings account, and while they aren't insured against loss of principal, they also offer the potential to appreciate over time.

To help you in your quest to find some great, high-paying stocks to supplement your 529, I've screened for companies that pay enormous dividends, but which also have five-year betas below 0.90 -- meaning they haven't taken shareholders on as much of a rollercoaster ride as the overall market has seen lately.

Company

Dividend Yield

5-Year Beta

Annaly Capital Management (NYSE: NLY  ) 15.4% 0.39
Hatteras Financial (NYSE: HTS  ) 15.2% 0.27
Telecom of New Zealand (NYSE: NZT  ) 11.7% 0.71
Cellcom Israel (NYSE: CEL  ) 11.1% 0.34
Windstream (Nasdaq: WIN  ) 8.2% 0.90
Copano Energy (Nasdaq: CPNO  ) 8% 0.90
Linn Energy (Nasdaq: LINE  ) 7.7% 0.72

Source: Capital IQ, a division of Standard & Poor's.

Granted, these aren't the most conservative dividend stocks out there. But if you have some time before your kids start their freshman year, putting some of your money into stocks like these makes sense to diversify your overall college savings portfolio.

Both Annaly Capital and Hatteras Financial are real estate investment trusts (REITs), which are federally obliged to distribute at least 90% of their taxable income to shareholders -- hence their big payouts. Both REITs have benefited significantly from the extraordinarily low interest rate environment, since they're able to purchase mortgage pass-through securities at insanely low rates and make money from the interest spread.

Telecom of New Zealand and Cellcom Israel are both foreign telecoms. Their industry typically generates substantial cash flow, enabling firms to shell out lots of dividends to shareholders. Windstream is a domestic telecom provider that operates in 23 states and has more than 1 million high-speed Internet customers. As investors seek higher and higher dividends these days, telephone stocks have seen their biggest surge in more than seven years, making these companies some of the most popular investments around.

Copano Energy and Linn Energy are both set up as limited liability corporations, and both dish out huge dividends to shareholders. Copano provides midstream services to gas producers, operating more than 6,000 miles of natural gas pipelines in Oklahoma, Texas, Wyoming, and Louisiana. Linn is an oil and gas company that focuses on the acquisition of properties; it holds reserves in the Anadarko Basin, as well as California and Kansas. Both of these approaches help shelter these companies from more violent commodity-like price swings.

Get smart about saving
Of course, every stock has risk associated with it, and these companies are no different. There's no guarantee that dividends will last forever, nor that share prices will hold up in difficult times. However, sitting in cash or CDs is not the answer, and it certainly won't help you reach your financial goals with regard to your children. 529s should be an important part of your investing strategy, but if you're tired of the fees and bored of the options, don't let that dissuade you from adding better investments for your college savings.

For some extra dividend opportunities that may better fit your investing style, click here to get The Motley Fool's five-page free report: "13 High-Yielding Stocks To Buy Today."

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jordan DiPietro doesn't own any shares of the companies mentioned. Cellcom Israel is a Motley Fool Global Gains choice. The Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2010, at 6:54 PM, S2000magician wrote:

    I shudder when I see statements like ". . . betas below 0.90 -- meaning they haven't taken shareholders on as much of a rollercoaster ride as the overall market has seen lately." Beta is not a measure of pure volatility, so the conclusion doesn't necessarily follow.

    Let's look at historical volatilities for these seven stocks:

    HTS has only 2 years, 7 months of price history; in that time its annualized volatility of monthly returns is 26.8%, compared to 21.8% for the S&P 500.

    CEL has only 3 years, 9 months of price history; its volatility of returns over that time is 38.5% vs 19.3% for the S&P 500.

    LINE: 4 years, 10 months of price history; 41.3% volatility vs 17.7% for the S&P 500.

    The remaining four have price histories of over five years. Their 5-year volatilities of returns are:

    NLY: 28.0%

    NZT: 26.5%

    WIN: 29.7%

    CPNO: 46.9%

    S&P 500: 17.5%

    Thus, over the last five years, every one of these seven stocks has, in fact, been more volatile than the S&P 500. They may have low betas, but that doesn't say anything (or, at least, much) about their rollercoasterness.

    (I'm not saying that they won't contribute to an excellent portfolio for college savings; they may very well. All I'm saying is that the volatility argument is flawed.)

  • Report this Comment On October 29, 2010, at 10:46 AM, Demoncrat wrote:

    Aside from being a grammatically poor article, the conclusions and methodology are suspect.

    A primary example being their top-recommendation of NLY. NLY primarily makes its money on the spread between borrow and lend. As interest rates rise, revenue streams drop. As the stream dries, the div will be cut and the yield will be less attractive and principle lost. This is a position you buy and watch closely or match with downside protection. It doesn't match the goal.

    For college savers, growth is secondary to capital preservation. Companies like Windstream, Linn Energy and Copano at least fit this mold better than Annaly Capital or Hatteras Financial.

    Instead, look at Altria (MO), Johnson & Johnson (JNJ), Verizon (VZ), etc.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1333718, ~/Articles/ArticleHandler.aspx, 9/20/2014 8:08:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement