Many investors lost money over the past couple of years, but the endowments at prestigious universities suffered even worse. Investment 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 returns.
With exotic strategies and illiquid investments, Princeton registered a 24% loss in 2009, while Cornell took a 26% hit, and Harvard suffered a 27% drop. Compare those losses to the 18% drop for the median large endowment. Worse yet, many such institutions fund their operating expenses with the capital from endowments like these. If they don't generate capital gains, they may be forced to cut budgets and slash salaries.
So what?
Rather than relying on capital gains to sustain our own budgets, we need to seek additional safety in the power of ever-increasing dividend streams. With such a strategy, you'll never have to float debt in order to avoid whittling down your principal. Princeton only wishes it could say the same.
The companies below provide a dividend yield at least as high as that of the S&P 500 (about 2%), and they've grown their dividends at more than 5% per year over the last half-decade:
|
Company |
Trailing Dividend Yield |
5-Year Avg Annual Dividend Growth Rate |
FCF Payout Ratio |
Sustainable Dividend Growth |
|---|---|---|---|---|
|
United Technologies |
2.4% |
15.4% |
27.9% |
14.4% |
|
STMicroelectronics |
3.7% |
18.5% |
17.0% |
0.0% |
|
Terra Nitrogen |
9.7% |
21.9% |
69.8% |
23% |
Source: Capital IQ, a division of Standard & Poor's. Sustainable dividend growth assumes constant payout ratio.
United Technologies and Terra Nitrogen have increased their dividends substantially over the past five years, and their sustainable dividend growth rates indicate that they may be able to sustain comparable growth rates in the future. Yet even though United's payout ratio is much lower, Terra Nitrogen's high returns on equity give it greater prospects for future dividend growth despite its much higher yield. Meanwhile, STMicroelectronics has also increased its dividend growth rates quite a bit, but despite a low FCF payout ratio, its dividends are nearly equal to its net income, limiting its potential future growth.
These are a handful of the thousands of public companies that can help you secure a third income for life. If you'd like to see which others make the cut, try Income Investor free for the next 30 days.
