As the father of a wonderful four-month-old baby girl, I've been asked several questions regarding how I plan on saving for her education. The real answer is I didn't really think about it in great detail - until this weekend. That being said, dividend reinvestment might be a good way for new parents to build a great foundation for their child's education. In this article, I've focused on ten solid companies that pay very nice dividends, and offer great second quarter growth potential, not to mention that these may be a great alternative to 529 savings plans.
Yield Summary
I've chosen ten blue chip stocks that tend to be less volatile and don't make drastic changes to their dividends. The companies I've chosen have paid solid dividends over the years and offer investors a great opportunity for dividend reinvestment. Currently, the companies all offer yields around 4%. These companies are AT&T (T) which yields 4.9 % ($1.76), Verizon (VZ) which yields 4.6 % ($2.00), Merck (MRK) which yields 4.3 % ($1.68), Pfizer (PFE) which offers 3.9 % ($0.88), General Electric (GE) which yields 3.4 % ($0.68), Altria Group (MO) which yields 4.9% ($1.64), Johnson & Johnson (JNJ) which yields 3.7% ($2.44), Consolidated Edison (ED) which yields 3.8% ($2.42), Intel (INTC) which yields 3.1%, and BP Plc (BP) which offers 4.8 % ($1.92).
Second quarter outlook
In terms of second quarter earnings, all ten companies have good outlooks. When screening these companies on an individual level, a primary long-term position should be considered from an income standpoint and a secondary consideration should come from a growth standpoint, as EPS performance is generally steady rather than volatile.
The June 2012 quarter outlook for all 10 companies is as follows:
Symbol | EPS | Revenue |
T | $0.63 | $31.99B |
VZ | $0.64 | $28.57B |
MRK | $1.02 | $12.20B |
PFE | $0.55 | $14.97B |
GE | $0.37 | $36.99B |
MO | $0.57 | $4.49B |
JNJ | $1.30 | $16.70B |
ED | $0.57 | $3.11B |
INTC | $0.53 | $13.61B |
BP | $1.63 | $101.6B |
Dividend reinvestment growth
Most 529 college savings plans last tax-free until the child's first semester of secondary education or their 18th birthday, whichever is sooner. That being said, the following returns are based on an initial investment of $1000 and monthly investments of $25 in each stock over an 18-year period.
Symbol | Base $ | Rate | Term | Final Balance |
T | 6400 | 4.9 | 18 Yrs | 10727.09 |
VZ | 6400 | 4.6 | 18 Yrs | 10378.33 |
MRK | 6400 | 4.3 | 18 Yrs | 10042.62 |
PFE | 6400 | 3.9 | 18 Yrs | 9614.42 |
GE | 6400 | 3.4 | 18 Yrs | 9108.82 |
MO | 6400 | 4.9 | 18 Yrs | 10727.09 |
JNJ | 6400 | 3.7 | 18 Yrs | 9408.33 |
ED | 6400 | 3.8 | 18 Yrs | 9510.72 |
INTC | 6400 | 3.1 | 18 Yrs | 8820.47 |
BP | 6400 | 4.8 | 18 Yrs | 10609.36 |
The average return is 64.67% over an 18-year period or an average of 3.59% annually. Even though most 529 plans offer slightly higher rates of return, they are comprised mainly of mutual fund families such as American Funds and Vanguard, and carry a greater risk if the market bottoms out due to the behavior of a specific sector as whole. Individual dividend reinvestment over the long term gives retail shareholders the benefit of such things as stock splits, special dividends and spin-offs, whereas with a mutual fund that is broadly diversified the direct effect of such events isn't reflected in their portfolio as much.
Please Note: The calculations assume each company's yield won't change over the given period either. The yields are based on the closing price of each stock as of Friday, June 15th, 2011. The withdrawal of these investments will be subject to various levels of taxation, of which the investor should consult an accountant for the proper taxation terminology with regard to the tax year the withdrawal occurs in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
