529 College Plan vs. Dividend Stocks

One of the things you get back after reaching financial independence is your time.  You wake up in the morning and your time is yours.  No having to go to work where your time becomes theirs (someone is telling you what to do.)  Like yesterday.  It had been a long week and I was tired.  Back when I was in college if I were tired I would go and take a nap and refresh myself.  Today, no way.  Gotta get that work done so the company can make more money.  The fact that my time was not my own and I couldn't decide what was best for me really irked me.  It also cause some dividend thoughts to pop into my head.

Several good bloggers write about time so it got me thinking about my son.  He started his freshman year in high school this year and I realized how little time I have spent with him recently and even over the years.  I am comparing my time to that of my wife who got to stay home and raise all of our great kids.  I am jealous (except for when they are not listening) and would like to spend more time with them.  By the time I reach FI they will be grown up and I will have missed their childhood.  Weekends are my time with them.  The company even tried to get people to voluntarily come in Sunday to work a full day.  I made my excuses and got out of it but not sure how long that will last.

This is where my dividend thoughts started to occur.  I remembered my son has a 529 College savings plan.  A 529 plan allows the investment to grow taxed deferred and withdrawals are tax free as long as they are used to pay for college in the state you have the plan in.  I haven't touched it in a decade and don't even know how it is doing.   In taking a look it has roughly doubled in size in 10 years.  This includes the Great Recession.  The portfolio is laid out like this:

Percentage of Portfolio
Vanguard 500 Index
Vanguard Extended Market Index
Vanguard Developed Markets International Stock Index

I think my original percentages were 70/15/15.  I would seem Extended Index has been doing well over the years and chewed away at the 500 Index fund.  I could rebalance but for now I am ok with it and will leave it as is.  The less you touch the less fees they charge.

Now would this investment have done any better just being allocated to dividend stocks of my choosing with no management fees over 10 years except for the initial broker fee to purchase them?  I chose two companies that have been on my mind recently that I don't own yet, McDonalds and Johnson & Johnson. 

Image courtesy of Morningstar.com

Would you look a MCD go.  Wow 5x growth.  So if a decade ago I had put all my son's money into MCD it would have quintupled (yes I had to look that up)!  I am assuming Morningstar.com factors in the dividends in the growth over time as well as stock valuation.  Of course you should never sink all of your money (or your kids) into one stock.  Looking at JNJ it still did better than the 529 portfolio.  A $10,000 investment almost climbed up to $30k in those 10 years.  Now I am guessing this doesn't include taxes paid each year so it is similar to the growth of the 529 plans.

If I had taken more time to learn about investing a decade ago my son's savings may have more than doubled.  To put my son's savings into good solid blue chip dividend payers he would probably be sitting on a large nest egg for college.  Would the tax free withdrawal for college outweigh the growth of individual stocks?  Probably on JNJ it would balance out for a kid who has little to no income (less taxes).  ForMCD you would still come out ahead. 

As always the key is to find the blend of dividend companies that are still growing and pay an ever increasing dividend.  The fees the 529 plan charges every year whittle away at the funds and spreading your investments across too many companies does seem to lessen the growth.  This seems like a good topic for another day. 

As an investor would you put your money in a 529?

Full Disclosure: Long on the 529 plan but do not own MCD or JNJ


  1. It's interesting that you posted this, as I was just having a conversation about the pros and cons of each. I have two very small children that we were going to start investing in a 529 plan. However, as I've been learning, I'm thinking more and more to simply invest in quality dividend stocks for them. Perhaps, a direct investment plan in a custodial account or similar.

    1. That is now what I have for my kids (custodial accounts). Less fees and more control. Plus if they decide not to go to college the account can continue to compound. Starting it when they are young gives them the advantage of time. If my parents had invested in MCD or JNJ when I was born in 1974 I probably would not have had to pay for college.

  2. Hi DFG,

    That's certainly an interesting point and if you're making an one-time purchase at the outset then stock commissions will be minimal. I just read that there's a "kiddie tax" - with the downside that the child's investment income higher than $2000 a year is taxed at the parents' marginal tax bracket not at the 15% dividend rate.

    The Index funds are going to return you only the average return from the stock market; so MCD and JNJ are definitely above average! Which is good because I own both stocks :)

    Had you started out with Bank of America (BAC) stock instead of MCD, the results wouldn't have been so great (BAC was a 30 year dividend growth stock removed from the David Fish list in 2008). So it comes back to Risk vs. Reward - you take a higher risk with picking individual stocks but you will potentially also get a bigger reward or a bigger loss.

    Likewise there's nothing to say you have to be fully invested in one approach over the other; you could put half the amount in funds in a 529 and half the amount in individual stocks (or whatever allocation you pick).

    Best wishes,

    1. Hey DL. All good points for me to ponder on. My kids broker custodial accounts I opened for them are not well diversified. So like you said the risk is much higher than a fund.


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