A Professor Plans His Own EnDOWment Fund For Retirement

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Includes: AAPL, BA, CNI, DIS, F, GE, GILD, JNJ, KMB, KO, LGF.A, MCD, MCK, NOBL, NOV, PFE, PG, SBUX, T, TRV, XOM
by: Ramonsito

Summary

Teachers at all levels must learn to live on modest salaries, which makes saving for retirement challenging.

A consistent habit of saving -- and investing -- can achieve excellent results over time.

One strategy that achieves capital preservation and reasonable long-term growth is Dividend Growth Investing.

Most educators pursue a career in teaching, scholarship, and service because they enjoy working with people, and because they enjoy a life of contemplation and research. Teachers do not pursue this line of employment for the high levels of financial compensation and the golden parachutes that await them at the end of their careers. Nevertheless, even college professors need to think about financial planning in order to ensure a comfortable retirement. This article describes how someone who earns a very modest salary, like a teacher, can generate an investment portfolio that can make a significant difference in retirement.

Salaries for teachers at every level (primary, secondary, and higher education) are very low compared with the financial compensation packages offered in other economic sectors and industries. In the state of Florida, for example, teachers in the public school systems can expect to earn approximately $40K plus modest health-care benefits during their first year of service. Teachers who have worked in a school district for thirty years will have a salary approaching $65K plus benefits.

Some college professors (myself included) work for private, independent institutions that offer more modest compensation packages for their employees. For example, at one institution of higher learning in the southeastern United States, the starting salary for an entry-level professor with a doctorate degree is less than $40K. At these levels of financial compensation, it is indisputable that most teachers pursue their life's work for reasons other than financial. Nevertheless, can somebody who earns such a modest salary ever save enough to fund a comfortable retirement?

The answer, of course, is YES. But one must be disciplined, consistent, and wise. The first place to begin is to enroll in the 401K plan to whatever level is matched by the employer. Many school districts have a 401K retirement plan where up to 3% of the employee's salary will be matched by the employer. This amounts to a 100% immediate profit for the employee. The first-year teacher, for example, will invest $1200 from her $40,000 salary, and the school district or institution will match this amount, bringing the first year total investment to $2400. If these funds are invested in a diversified mutual fund or ETF, such as the SPY ETF or the Vanguard SP500 fund, this initial modest investment will grow approximately 8% every year.

An initial investment, including the matching funds from the employer at the end of the first year of teaching would amount to $2400. At a total return of 8%, this initial investment would grow $192. This modest portfolio would have an ending balance of $2592 at the conclusion of the year. Rinse and repeat for another 30 to 40 years, and even a teacher making a modest salary can begin to think about retirement.

Now, let's take this planning to the next level. The wise and prudent educator knows the value of repetition. Outside of the 401K plan, even a professor making a modest $40K per year can learn to save another 7% of his salary. Using this salary figure, another $2800 would be set aside for investing. I would recommend that the teacher invest this portion of her savings in a Roth IRA account, perhaps in a Dividend Growth mutual fund, such as the Vanguard Dividend Growth Fund (VDIVX) or the Dividend Aristocrats ETF (BATS:NOBL) for passive-oriented investors.

For those educators who prefer to actively manage their own investment accounts, they can begin to create a portfolio comprised of the Dividend Aristocrats, companies that have not only paid shareholders dividends for at least 25 consecutive years, but they have increased those dividends each year. Sample tickers include Coca-Cola (NYSE:KO) Procter & Gamble (NYSE:PG), Johnson & Johnson (NYSE:JNJ), Kimberly-Clark (NYSE:KMB), Exxon Mobil (NYSE:XOM) and Travelers (NYSE:TRV). In the table below, I detail my current portfolio, which I have affectionately labeled, "My personal endowment fund." I chose this label because a significant portion of the portfolio consists of large-cap, blue chip, highly recognizable companies, comprising the Dow Jones Industrial Index. Other companies in my portfolio, while they may not be part of the Dow, share many of the characteristics of the companies comprising the Dow. Hence, a professor's enDOWment fund.

Here is the Portfolio (as of October 6, 2014):

Ticker

Shares

Price

Net Value

Annual Dividend

Dividend Yield %

Annual Dividend

INCOME

AAPL

70

99.62

6959.70

1.88

1.89

56.40

BA

50

126.26

6313.00

2.92

2.31

146.00

CNI

30

69.82

2094.60

0.91

1.31

27.30

DIS

75

88.56

6642.00

0.86

0.97

64.50

F

300

14.52

4356.00

0.50

3.43

150.00

GE

200

25.22

5042.00

0.88

3.46

176.00

GILD

25

105.13

2626.75

none

n/a

n/a

KO

30

43.60

1306.50

1.22

2.84

36.60

LGF

50

32.50

1625.00

0.28

0.85

14.00

MCD

100

93.84

9384.00

3.40

3.58

340.00

MCK

50

196.62

9831.00

0.96

0.48

48.00

NOV

75

73.54

5508.75

1.84

2.50

138.00

PFE

200

29.17

58.34

1.04

3.56

208.00

PG

50

83.57

4177.50

2.57

3.07

128.50

SBUX

75

75.14

5633.25

1.04

1.37

52.00

T

200

35.49

7098.00

1.84

5.20

368.00

TRV

50

94.70

4735.00

2.20

2.33

110.00

XOM

100

94.52

9447.00

2.76

2.94

276.00

             

Total

   

103540.95

   

2339.300

Over several years, I have generated a modest enDOWment portfolio, that currently generates about $2339 per year. My strategy is to increase shares in these and similar companies by reinvesting the dividends earned, and by investing additional funds as ability permits. A plan to select companies that pay growing dividends will likely prove successful in generating income during retirement. Although I have focused on a dividend growth investment strategy, I have also included a few pure growth companies, such as GILD, that offer the potential for significant growth in this key sector of health. Since my planned retirement is about a decade away, including a few growth companies may prove to be a wise strategy, along with a majority of companies that have a strong history of growing their annual dividends. I will revisit this personal enDOWment fund periodically to assess its progress.

My article is intended for illustration purposes only, and readers must conduct their own due diligence before making investment decisions.

Disclosure: The author is long AAPL, BA, CNI, DIS, F, GE, GILD, KO, LGF, MCD, MCK, NOV, PFE, PG, NOV, SBUX, T, TRV, XOM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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