Paying for college is expensive. It takes great investments to provide the growth and income you need to be able to afford it. As long as you make those investments and get started early, though, you can get your kids through college without ending up in the poorhouse.
Doing the prep work
Over the past couple of weeks, I've gone over some of the ways that parents can start saving for college expenses. Basic advice, like cutting unnecessary expenses to free up some spare money in your budget for investing, are critical first steps for many folks to get started on this long, scary road.
In the end, though, you have to figure out what investments are going to get you to the six-figure sum you may need to finance a college education. To help get you started, let's take a look at six stocks that you can use to create a portfolio that has a great chance of enabling you to reach your goal of giving your child a crucial leg up over those who have to use student debt to pay for college.
3 kinds of stocks
As with any investment goal, the best portfolio for college savings acknowledges the time frame you have to invest as well as the competing considerations of risk and reward that you have to weigh. If you start early, then you may have 15 to 20 years before you need to worry about exhausting your college fund, giving you maximum flexibility to invest. But even if you get off to a late start -- say, with just eight to 10 years left -- you can still use these three categories of stocks to help guide you:
- High-impact growth stocks. Aggressive companies with good growth prospects can give you very high returns, but they're not for the meek.
- Undervalued opportunity stocks. Taking advantage of values in the market gives you an inherent advantage over paying full price.
- Cash-paying dividend stocks. You'll eventually need to start taking money out of your college portfolio, and dividend stocks will help you with income without having to sell shares.
Let's take these in turn.
Growth stocks give you the best chance to turn small investments into huge payoffs. But they also come with higher risk, and their popularity can make them more expensive than they're worth.
The current economic troubles have been problematic for many growth stocks, but some have bucked the trend. Intuitive Surgical (Nasdaq: ISRG ) continues to see its unique robotic surgical devices used in new procedures, and even in a recession, growth has continued. With such potential, even paying 30 times 2011 estimates may not be too pricey. A riskier play is A-Power Energy (Nasdaq: APWR ) , which trades at a forward earnings multiple of just 6. However, it's disappointed investors the past two quarters with earnings misses, so you need to have confidence that small and medium-sized users will want to generate their own power.
Growth isn't everything. Even slower-growing powerhouses can be great investments over time when the price is right.
Right now is a great time for value-priced stocks. JPMorgan Chase (NYSE: JPM ) , for instance, trades at book value and 12 times earnings and appears to have emerged largely unscathed from the financial crisis. Transocean (NYSE: RIG ) will be mired in the aftermath of the Gulf oil spill for some time, but at seven times earnings and below book value, it's a value play that could pay off if the worst-case Gulf scenario doesn't play out.
More than anything, dividend-paying stocks do what other investments don't: show you the money, quarter in and quarter out. The best long-term plays combine a good yield with great ongoing dividend growth.
Chevron (NYSE: CVX ) is a great example of such a stock. Paying 3.5% now, Chevron has increased its dividend at a 10% clip over the past five years, and has a 19-year history of hiking its payouts every year. Procter & Gamble (NYSE: PG ) has an even more impressive track record, with 56 straight years of higher dividends and around 12% annual dividend growth since 2005 to go with its 3% yield.
Alternatively, a dividend ETF can help with this part of your college savings. Vanguard Dividend Appreciation (NYSE: VIG ) pursues stocks like Chevron and P&G among dozens of others. It's a simple way to get broad dividend stock exposure.
These six stocks certainly aren't the only ones that could get your kids through college, and they're far from a sure thing. They don't come without risk. But if you follow this simple three-step approach, you'll be able to find all sorts of stocks that meet your needs and can get you on the right path for your college savings.
Stay tuned each Wednesday in September and October as Dan goes through the ins and outs of saving and paying for college.