4 Stocks To Help Pay For College Tuition

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Includes: BRK.B, DE, GIS, JNJ
by: Doug Van Cuyk

Summary

This article investigated three possible methodologies for saving money for my daughter's future costs associated with education. Offering up which one worked best in our situation.

This article outlines my criteria for selecting stocks for a college portfolio and what I felt are important characteristics for inclusion.

This article discusses our plan for investing money in four stocks that I feel comfortable in their long term potential as I plan on holding them for 18 years.

With the recent birth of our first child, my wife and I had a lot of decisions to make ranging from what type of diapers to where we wanted to raise our child. Perhaps one of the bigger decisions often overlooked that we decided to tackle early was helping our new bundle of joy start saving for college. As I dabble in the investing world and have read several books discussing the topic, I decided to do some additional research. Through discussions with peers, mailings and reading various online items pertaining to the topic, I came across three that seemed to be in the running for our child's college savings. First is the 529 plan, second was the Gerber Life plan and third was using my background and investing the money in the stock market. Here is a little background on each of the options and how I viewed them.

529 Plan - The 529 plan is a savings plan designed to set aside money for secondary education. This plan gains special tax benefits and can vary from state to state. The big drawback I saw regarding the 529 plan is the requirement that the money needs to be used for education costs. With how fast things change regarding education, I cannot imagine what the landscape is going to look like in 18 years when the money would be available.

Gerber Life Plan - The Gerber Life Plan offers more flexibility than the 529 plan as you can use the money for anything. Additionally, this offers a sort of life insurance aspect in the event of unexpected death of the individual paying the premiums in which case the beneficiary would receive the full benefit at maturity. Additionally, this option has guaranteed growth over the course of the investment.

Investing in the stock market - As I am guessing most of you guessed, I chose this option and here is why. Investing has tax benefits when the investment is held long term, as I don't plan on selling any securities for 18 years, that would be considered long term and would be tax as long term capital gains. Secondly, the money can be used for anything our child prefers. Thirdly, and most important to me, by choosing stocks that are present in our lives, I am hoping to get my daughter interested in the market at a young age as time one of the biggest factors in compounding your return. Finally, of the three options presented, the market has the greatest opportunity to create wealth and in this case offset college costs when considering the three options.

Now that I have discussed the reasoning behind my decision, let discuss how I decided what to buy. I had three main criteria that I wanted to maintain while forging ahead with building the college fund portfolio, here they are:

1) The company has to make/operate in an industry that is a part of my family's life. I want my child to know about the company through her daily life as this should make the company more familiar/interesting to my daughter as she is growing up. For example, is your child going relate more easily to Disney (NYSE:DIS) or Freeport-McMoRan Inc (NYSE:FCX)?

2) The company cannot be involved in sin products. Similar to part one, while I hold Philip Morris (NYSE:PM) in my personal account, I did not want to introduce my daughter to investing with sin stocks.

3) The company needs to operate in an area that I can see being around for a long time, potential forever. Additionally, I tried to pick the cream of the crop with each investment. As I don't plan on selling my holdings for 18 years, I would prefer to sleep well at night with these holdings.

4) Not as important (as you will see from one of my purchases) as the top three, but close, is my desire to invest in companies paying a growing dividend. Companies with a long history of paying growing dividends traditionally offer a type of safe haven and this fits well with my desire to hold the stocks long term.

As I have discussed my plan for looking for stocks, let's discuss what I picked and why I picked them.

First purchase was Deere & Co. (NYSE:DE). As my wife's family is a farming family and we are living in a farming community, Deere & Co. will be a huge part of my daughter's life. Deere & Co. is one of the largest heavy equipment companies in the world and depending on who you talk to makes the best farming equipment in the world as well. Deere & Co. is involved in feeding the world, which is an ever growing problem, which makes me believe the company is not going anywhere anytime soon.

Second on the purchase list is General Mills, Inc. (NYSE:GIS). I have always been a big fan of breakfast and my favorite part of breakfast is a big bowl of cereal. General Mills is a huge manufacture of packaged foods that seems to own a lot of real estate in the grocery store. Similar to my first purchase, General Mills involvement with feeding the world reassures me of their longevity.

Third on the purchase list is Johnson & Johnson (NYSE:JNJ). As we started shopping to fill our needs for our daughter, I started to notice that three companies make just about everything for the home, JNJ, Procter & Gamble (NYSE:PG) and Kimberly Clark (NYSE:KMB). When comparing the three to decide which one to purchase, I felt Johnson & Johnson offered the best future prospects and fundamentals, so I elected to purchase JNJ. Any of the three would have fit my criteria to be in the portfolio.

Fourth on the list is Berkshire Hathaway Inc. (NYSE:BRK.B). Some could argue BRK may not have the same long term clarity as my other choices due to the age of Warren Buffet, however, I feel he has plenty of qualified leaders to take over when the time comes. Additionally, I questioned whether to include this due to the lack of a dividend, but the return over the long term more than makes up for the lack of a dividend.

Now that we know what I planned to invest in, let's discuss the strategy for investing both in the short term and long term. Initially, we decided to invest $1,000 in the account with a plan to add $500 each year on her birthday. Over the course of her 18 years in we will have invested $10,000 into the account which seems more than adequate to give her a start. Initially I split the funds equally among the four holdings as much as I could with the stock prices where they were. With future money, I plan to evaluate each holding at the time I am investing the money and split based on my evaluation. I am open to putting everything into a single holding, or continuing to spread across all four. I am even open to adding another holding to the portfolio based on life changes and my daughter's interests. I will try my best to not sell anything as this will incur taxes that I am trying to avoid with long term holdings.

I purchased the stocks back in August 2015 and below is my daughter's holdings at the time of purchase last August.

Holding

Shares

Purchase Price

Initial Investment

BRK-B

2

$ 132.75

$ 265.50

DE

3.046

$ 77.50

$ 232.50

GIS

4.061

$ 56.75

$ 227.00

JNJ

3.043

$ 95.00

$ 285.00

Total

$ 1,010.00

Due to dividend reinvestment and capital appreciation, the current value as of market close on May 27 is:

Holding

Shares

Current Price

Current Value

BRK-B

2

$ 143.35

$ 286.70

DE

3.046

$ 80.50

$ 245.20

GIS

4.061

$ 62.87

$ 255.32

JNJ

3.043

$ 113.06

$ 344.04

Total

$ 1,131.26

The 13% return this has seen over the course of year one is above what I am anticipating/planning on. I am hoping for a return between seven and ten percent over the course of the holding period. Based on investing the $10,000 over the course of 18 years, I would envision investing at all ends of the business cycle for the companies. Below is an outline of gains based on the percentage I am hoping to return on the investment over the course of the 18 years. This should be a nice little start for paying for school or whatever she decides is the best use of her college money.

Year

Investment

Total Invested

7% Gain

10% Gain

0

$ 1,000.00

$ 1,000.00

$ 1,070.00

$ 1,100.00

1

$ 500.00

$ 1,500.00

$ 1,679.90

$ 1,760.00

2

$ 500.00

$ 2,000.00

$ 2,332.49

$ 2,486.00

3

$ 500.00

$ 2,500.00

$ 3,030.77

$ 3,284.60

4

$ 500.00

$ 3,000.00

$ 3,777.92

$ 4,163.06

5

$ 500.00

$ 3,500.00

$ 4,577.38

$ 5,129.37

6

$ 500.00

$ 4,000.00

$ 5,432.79

$ 6,192.30

7

$ 500.00

$ 4,500.00

$ 6,348.09

$ 7,361.53

8

$ 500.00

$ 5,000.00

$ 7,327.45

$ 8,647.69

9

$ 500.00

$ 5,500.00

$ 8,375.38

$ 10,062.45

10

$ 500.00

$ 6,000.00

$ 9,496.65

$ 11,618.70

11

$ 500.00

$ 6,500.00

$ 10,696.42

$ 13,330.57

12

$ 500.00

$ 7,000.00

$ 11,980.17

$ 15,213.63

13

$ 500.00

$ 7,500.00

$ 13,353.78

$ 17,284.99

14

$ 500.00

$ 8,000.00

$ 14,823.54

$ 19,563.49

15

$ 500.00

$ 8,500.00

$ 16,396.19

$ 22,069.84

16

$ 500.00

$ 9,000.00

$ 18,078.92

$ 24,826.82

17

$ 500.00

$ 9,500.00

$ 19,879.45

$ 27,859.50

18

$ 500.00

$ 10,000.00

$ 21,806.01

$ 31,195.45

These are my thoughts on how I plan to offset my daughter's future costs associated with education. As I cannot predict the future, I wanted to have some flexibility on how the money could be spent when the plan comes to maturity so I opted to invest in the market rather than the 529 or Gerber Life plans. As I am sure many of you have come across these same options, I am curious to hear what others have done and some of the reasoning behind your decisions. Additionally, what are some stocks that would fit well into a college fund type portfolio? Please leave your thoughts in the comments below.

Disclosure: I am/we are long BRK.B, DE, GIS, JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This analysis offers up opinions of the author and are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decisions.