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.
Annaly Capital Management
Telecom of New Zealand
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.