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I’ve been startled recently by many news stories about the massive declines in endowments at elite universities such as Harvard, Yale, Stanford, and Princeton. Sure, many investors lost money over the past year, but the performance at Harvard and Yale "badly trailed" the results at the average college, as The Wall Street Journal so delicately put it. I'm shocked, but not because of these endowments' lackluster performance.

With exotic strategies and illiquid investments, the endowments racked up the following investment losses in their latest fiscal year:

  • Harvard -- 27%
  • Columbia -- 16%
  • Princeton -- 24%
  • MIT -- 17%
  • Cornell -- 26%
  • Brown -- 23%

Those losses compare to the 18% drop for the median large endowment.

Well, so what?
The market has been a beast to investors over the last year, and I'm not faulting investment decisions here. The shocking part to me is that the capital of these endowments is used to fund operational expenses at many such institutions. This fact means that investment managers have to turn a profit, lest the schools cut their budgets for capital expenses (and even more pressing concerns, such as salaries).

In response to the investment losses, Yale has had to take action. It's already projecting annual budget deficits of $150 million from the 2010-2001 academic year to the 2013-2014 year. Last winter, it cut staff and non-salary expenses and indicated that would ask for more cuts in 2010-2011.

Princeton is in a similar boat, mimicking the moves that many consumers are making as their investment returns dry up by cutting its budget and borrowing money, because it doesn't want to sell when the market could improve.

But why depend on capital gains?
Increasing their capital gains was one of these schools’ primary means of getting the money to fund their budgets.  And as you're no doubt aware, the market doesn't always go up, so such a strategy is fraught with danger.

What if you buy in at the wrong price? Because you need the money, you have to sell at whatever the market will offer you. Such a short-term mentality can ruin you. If you had purchased American Express (NYSE: AXP  ) at around $40 in September 2008, it seemed you were getting a great deal. The stock was down more than 30% from its highs. And it's a great franchise for the long term and a favorite business of Warren Buffett's Berkshire Hathaway. Regardless, over the course of the year the stock bottomed at $10 and still has not returned to $40. The same can be said of many formerly high-flying financials, such as Bank of America (NYSE: BAC  ) , whose stock is nowhere close to its highs. If you have to sell Amex at $10 in order to pay your mortgage (or your professors' salaries), you have to sell it.

Rather than relying on capital gains to sustain our budgets, we need the power of ever-increasing dividend streams. With such a strategy, you -- unlike Princeton -- will never have to float debt in order to avoid whittling your principal down. Think of it as a third income.

A third income?
This investing debacle suggests why individual investors should look to strong dividend-paying companies that increase their payouts over time.

My vision for retirement is to rely exclusively on dividend income. Sure, Uncle Sam may chip in his two bits, but my wife and I will rely on the steady stream of income provided by some of the world's most profitable companies. By relying on steady dividend income from a diversified portfolio of blue-chip companies, you'll never have to worry about declining stock prices. On the contrary, massive market downturns become a great opportunity to buy into even bigger dividend streams, as stocks prices crater and yields soar.

The only downside of this strategy is that you need to have a long-term horizon, but when the dividend dynamo starts really working, you feel the anticipation of getting a sizeable dividend check every three months. And unlike fluctuating interest rates that have killed those who recently invested in CDs, dividend-paying companies tend to increase their payouts year after year -- despite the rare series of reductions we recently experienced. In fact, it's not unusual for the best companies to increase their payouts from 7%-10% per year. I like a 10% raise every year, especially in retirement. And there are plenty of safe investments that offer solid yields that have been growing much faster:


2003 Dividend

2008 Dividend

5-Year Average Annual Growth Rate

Current Dividend Yield

PepsiCo (NYSE: PEP  )





Novo Nordisk (NYSE: NVO  )





United Technologies (NYSE: UTX  )





Kraft Foods (NYSE: KFT  )





Disney (NYSE: DIS  )





Data provided by Capital IQ, a division of Standard & Poor’s.

While Disney's annual dividend growth rate is certainly impressive, a 1.1% yield is hardly something I'd like to retire on. So the experts at Motley Fool Income Investor are focused on companies that offer a yield of 3% or better. But will those dividends last -- and will you get a bigger raise next year? Our experts can provide skilled analysis on which dividends are sustainable – and even better, likely to be increased.

To find the stocks that will be able to raise their dividends over time, advisor James Early looks for companies that

  • Offer attractive yields (the average is 4%)
  • Have the potential for capital gains
  • Are run by solid managers
  • Enjoy stability from scale
  • Have rock-solid finances
  • Utilize winning business models

There are handful of the thousands of public companies that possess these qualities that can help you secure a third income for life. If you’d like to see which ones our team believes make the cut, you can even try Income Investor free for the next 30 days -- just click here.

Already a member of Income Investor? Log in here.

Jim Royal owns shares of Bank of America. Berkshire Hathaway and Disney are Stock Advisor selections. American Express, Berkshire Hathaway, and Walt Disney are Inside Value recommendations. PepsiCo is an Income Investor pick. Novo Nordisk is a Global Gains selection. The Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 17, 2009, at 7:56 PM, SteveTheInvestor wrote:

    Only one stock listed yields over 3% which in my mind is the minimum to qualify as an income stock. The rest are overpriced considering the state of the economy.

    Kraft has its own set of problems. The reason it's yielding over 4% is that the market doesn't like the stock. Who can blame them? Kraft's obsession with acquiring Cadbury is potentially destructive.

    I'll wait until some better deals come by.

  • Report this Comment On November 17, 2009, at 9:52 PM, tkell31 wrote:

    Can you please just run the same story over and over again. I think everyone gets the value of dividend stocks. If I hear about JNJ, PG, KO, PEP blah blah blah. Yeah, we get it. Dividends are good and reinvesting them is even better. Good grief Charlie Brown.

  • Report this Comment On November 17, 2009, at 10:15 PM, ozzfan1317 wrote:

    I have KO and BP and MSFT in my portfolio so yeah i'm sure we got the memo by

  • Report this Comment On November 17, 2009, at 10:50 PM, DownEscalator wrote:

    What gets me is that PG, KO, PEP, etc. are not even close to being the best dividend stocks on the market...

  • Report this Comment On November 18, 2009, at 9:51 AM, Matt015 wrote:


    That is the point. They want your money. Its that simple, Motley Fool is a business. They won’t trumpet their great picks in the free articles.

    It comes down to paying for a service that the Fool hopes you are too lazy to do yourself.

  • Report this Comment On November 18, 2009, at 3:22 PM, berrelbink wrote:

    Top 50 list of the highest dividend yielding S&P 500 Dividend Aristocrats:

  • Report this Comment On November 20, 2009, at 12:38 PM, SmlCapsRule wrote:

    An evaluation of various university's portfolio strategies should not stop at 1 year gain or loss.

    What is the % gain or loss over, say, 10 or 15 years for these universities?

    If a high-roller has, for example, quadrupled in 15 years and is down 30 percent this year, in't that better than a more cautious one that has, for example, doubled in 15 years and is down ony 10% this year?

  • Report this Comment On November 21, 2009, at 9:47 AM, mmcclell wrote:

    Interesting you use BAC as an example of a poor holding. Obviously true in retrospect, but 18 months ago, it was considered a nice safe dividend payer.

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