How professional athletes could invest to prepare for their retirement

One of the main characteristics of professional sports athletes in comparison to other professions is that they often earn an extraordinary amount of money in a relatively short period of time. However, not every athlete succeeds in generating a sustainable financial return from it.  

Mike Tyson, Diego Maradona, Dennis Rodman and Evander Holyfield are only some of the famous and successful former sports athletes who went bankrupt after the end of their sports careers. 

Sports Illustrated estimated that “78% of NFL players are either bankrupt or under financial stress within two years of retirement and 60% of National Basketball Association players are broke within five years of leaving the sport.” The German Association of Professional Football Players (“Vereinigung der Vertragsfußballspieler”) refers to a statistic that shows that 26% of German professional football players are in debt or completely broke at the end of their football careers.

However, there are also examples of professional sports athletes who succeed in investing their money they earned during their sports career: “Players are now taking more ownership over decision-making when it comes to their investments,” says Courtney Brunious, associate director of USC’s Sports Business Institute. The former professional basketball superstar Shaquille O’Neal, for example, invested in Alphabet (the former Google) before its stock market launch in 2004.

The reasons for the enormous financial problems faced by former athletes can be diverse: injuries, divorces, alimony payments, or even dishonest advisors who lead athletes to make the wrong investment decisions.

Here you can find detailed investment analysis of companies listed on the stock market.

Some reasons why so many athletes go bankrupt after the end of their career, however, are similar for many of them:

1. Living a lifestyle that stretches the budget coupled with a lack of financial knowledge:

A lot of athletes who find themselves bankrupt overspent their money on extravagance and lived a lifestyle that stretched their budget. Additionally, according to Sports Illustrated, most athletes lack the financial knowledge of managing the money they are earning during their professional sports career.

Regarding an article by Jacqueline Palank from the Wall Street Journal: “It’s more than just dropping thousands of dollars at a nightclub or buying Porsches and Escalades for yourself, your parents and your crew. It’s getting a $1 million check when you don’t even know how to open a bank account. It’s not hiring the right advisers to manage your career and your money. It’s being targeted by fraudsters claiming they can multiply (or resurrect) your wealth.”

2. A small earning window:

As mentioned before, professional sports athletes have a unique problem that other professions do not have. The earning window of professional sports athletes is very small.  While a person in a traditional career could work between 30 and 50 years, professional sports athletes only do their job for a small fraction of this time. This makes it very important that the sports athletes invest their money during their career in a way to be able to benefit from their investment decision during and after the end of their sports careers.

Andre Collins, executive director of the NFL Players Association (NFLPA) Foundation, said players’ transition to life after football is difficult, “even for the most prepared players who have gotten a solid education. For a young person, it’s tough. There is a window when it can be difficult if they go from earning a great salary to earning nothing.”

The investment focus on stable and financially healthy dividend growth companies:

For professional sports athletes, focusing on companies that are financially healthy and that have a stable and proven business model, which they understand perfectly, could help them to make the right investment decisions in the future. Additionally, it could be possible to lower the risk of the investments, building a diversified investment portfolio.

For the investment portfolio, companies that are able to pay growing dividend payments due to their constantly growing revenue and profit could be chosen. The dividend is the sum of money paid regularly by a company to its shareholders. Dividends could be interpreted as a form of cash flow to the investor. These dividends could help the professional sports athletes to generate an additional passive income during and after their sports careers.

Additionally, it could be important to choose those companies to invest in, which have a low dividend payout ratio. The dividend payout ratio is very important for investors, because on one side it shows how much of the company’s profit is given back to its shareholders, and on the other side it shows if there is still a range for future dividend enhancements.

Choosing companies to invest in with a constantly growing dividend payment and with a low dividend payout ratio could enable the sports athletes to earn an increasing amount of passive income each year in the form of dividends paid by the companies they invest in.

Here you can find detailed investment analysis of companies listed on the stock market.

The investment of a Spanish LaLiga football player in Johnson & Johnson as an example:

Regarding the Global Sports Salaries (GSS) report and Forbes Magazine, Spanish LaLiga football players earned $2,896,151 annually on average during the season 2018-19. Let’s assume that an athlete would only invest 10% of his average annual income and that his career would have a time period of 10 years: 10% out of $2,896,151 would be $289,615. Let’s assume the athlete would invest this $289,615 each year in the company Johnson & Johnson.

The pharmaceutical company currently pays a dividend of $3.94. Considering the current price of the Johnson & Johnson share of $154.5, (dated 19.12.2020) this would mean a dividend yield of 2.6%. The dividend yield is calculated by dividing the dividend per share by the price per share.

The dividend payout ratio is calculated by dividing the dividend per share by the earnings per share. In 2019, the dividend payout ratio of Johnson & Johnson was 65.55% which means that 34.45% of the company’s earnings remained in the company. The dividend payout ratio of Johnson & Johnson is an indicator for the financial health of the company and for the stability of its dividend, because it shows that 34.45% of the earnings remain in the company and can be used for dividend enhancements in the future.

Johnson & Johnson has continuously increased its dividend for 57 years. For the last 10 years, the dividend increased by an average of 7% each year. This information is very important for investors, because it means that about every 10 years, the dividend could be doubled, as long as the company is able to continue to increase its revenue and profits constantly.

Since you currently get a dividend yield of 2.6% for your Johnson & Johnson investment, in about 10 years you could receive a dividend yield of 5.2%, in 15 years of about 7.17% and in 20 years of about 10.4% for your initial investment. This would mean that if you invested each year $289,615 (being 10% of the average salary of a Spanish LaLiga player of one year) in Johnson & Johnson, you could receive in the first year $7,529 (2.6% out of $289,615) in the form of dividends before taxes. In 10 years, you could receive $150,599 (5.2% out of $2,896,151 you invest over a time period of 10 years) in dividends before taxes, in 15 years $207,654 (7.17% out of $2,896,151 you invested over a time period of 10 years) and in 20 years $301.247 (10.4% out of $2,896,151 you invested over the time period of 10 years). Please note that it is assumed that the company is able to continue to increase its revenue and profits constantly to be able to increase its dividend payments.  

In addition to the dividends, professional sports athletes could benefit from the increasing value of the company over time. The Johnson & Johnson analysis shows that you could expect a long-term yield of about 8%-10% with an investment in Johnson & Johnson (including the dividend payments). A long-term yield of 8% would mean that if you invest over a time period of 10 years each year the amount of $289,615 (being 10% of the average salary of a Spanish LaLiga player) the invested amount would become $5,156,424 after 10 years and $11,132,334 after 20 years.

Building a diversified investment portfolio in which you focus on stable and financially healthy dividend growth companies could help professional sports athletes to gain an important amount of money in the form of dividends during and after their professional sports career. The individual investment portfolios of every athlete, however, may differ from one another, depending on the situation of each athlete and depending on the objective of each individual investment.

Here you will find all currently available investment analysis.

Sources:

https://www.wsj.com/articles/BL-BANKB-18343

https://vault.si.com/vault/2009/03/23/how-and-why-athletes-go-broke

https://www.investopedia.com/financial-edge/0312/why-athletes-go-broke.aspx

https://globalsportssalaries.com/GSSS%202018.pdf

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