College is expensive. It's become common for graduates to be saddled with student loans that are difficult or impossible to pay off. One way to avoid this fate for your child is to save money now. If you've got a while before your kids go off to college, the stock market is a great place to grow a college fund.
What stocks to buy? Three of our Motley Fool contributors have some ideas. Here's why you should consider investing in Brookfield Infrastructure Partners (NYSE:BIP), Cisco Systems (NASDAQ:CSCO), and Cree (NASDAQ:CREE) to fund your child's college education.
Cash-generating assets backed by a great asset manager
Tyler Crowe (Brookfield Infrastructure Partners): If you're looking for a stock that will be a great wealth builder over the next decade or more, then Brookfield Infrastructure Partners should be high on your list. Brookfield boasts two things that set a foundation for long-term wealth accumulation: a portfolio of cash-generating assets around the world and an asset-management team with a long track record of producing great results.
One thing that has made Brookfield's management team so successful over the years has been its insistence on sticking to a plan when it comes to growth and financing. Instead of stretching its cash flow to keep growing its payout to investors, management targets paying out around 65% of its funds from operations as dividends. The rest gets plowed back into the business for both maintenance and growth capital spending. Having a steady stream of growth capital gives its management team the ability to invest in undervalued assets in a wide range of industries including toll roads, electric transmission lines, natural gas pipelines, and data centers.
Over the past decade, Brookfield Infrastructure Partners has been able to grow its payout by 11% annually. Even though its stock price has been in line with the S&P 500, incorporating its dividend translates into a total return more than double the S&P 500's.
This is one of those stocks that probably isn't going to wow you with massive gains over a short period of time. Instead, a methodical approach to growing the business and assets under management has led to steady returns. With a dividend yield of 5.5% today, what more can you ask for in a stock for your college fund?
Check out the latest Brookfield Infrastructure Partners earnings call transcript.
A dominant tech company
Tim Green (Cisco Systems): Networking hardware giant Cisco's products form the backbone of the internet. The company has a dominant share of the Ethernet switching and enterprise router markets, despite years of facing lower-priced competition. Switching costs are already high, and Cisco's push to sell its hardware as a subscription, bundled with software, only makes its products stickier.
Cisco is no longer a fast-growing company, and its core business is sensitive to global economic conditions. But in the world of tech stocks, it doesn't get much more stable than Cisco. The ongoing trade tensions between the U.S. and China could cause problems for the company, but that doesn't change the long-term picture. Cisco's growth will be driven by software and services, with Cisco increasingly selling solutions, not just hardware.
Even after surging over the past few years, shares of Cisco still aren't all that expensive. Based on the average analyst estimate for fiscal 2019 adjusted earnings, the stock trades at a price-to-earnings multiple of just over 15. And the company pays a solid dividend that currently yields about 2.8%.
If you're searching for a tech stock that can be held for the long run, look no further than Cisco.
Check out the latest Cisco Systems earnings call transcript.
A truly bright idea
Sean Williams (Cree): If you want a bright idea that'll potentially help put your children through college, consider a company that, well, is in the business of bright ideas: Cree.
You probably know Cree best as the company behind a host of LED light and lighting system solutions. LED bulbs use less electricity, last longer than traditional bulbs, and are more cost-effective over the long run. There's a good chance you have one in your home right now. Not only does the company benefit as LED adoption grows, but Cree could see a steady uptick in demand from the cannabis industry. Yes...the cannabis industry.
Historically, marijuana growers have used high-pressure sodium (HPS) lights when growing cannabis. The yield on crops is predictable with HPS lights, but they are associated with high electric costs, and they produce a lot of heat, leading to added cooling system costs. On the other hand, LED lights cost more up front, but have significantly lower long-term electric costs, and produce far less heat. As time has passed, production costs have come down a bit, providing more incentive for growers to make the switch, or at the very least give LED lights a try. As the cannabis industry expands from a legal perspective, it's just another boost for Cree.
Beyond lights, Cree is also a driving force in the electric vehicle (EV) space. The company's Wolfspeed silicon-carbide products enable high-voltage power conversion which, ultimately, leads to improved drivetrain efficiency for EVs and longer driving ranges. Recently, Cree signed a multiyear agreement with STM Microelectronics (NYSE:STM) worth $250 million to supply STM with silicon-carbide wafers for automotive and industrial applications. In other words, the connected society feeds right into Cree's long-term game plan.
This is a company that has the potential to grow sales at or near 10% a year, with bottom-line growth surpassing sales growth as margins expand and production costs fall. It may not be a flashy choice by any means, but Cree has what it takes to help send your kids to, and through, college.
Check out the latest Cree earnings call transcript.