3 Fat Payouts From Market Leaders

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 Parcel Service (NYSE: UPS  )

2.8%

8.6%

50.4%

12.3%

Delhaize Group (NYSE: DEG  )

2.2%

7.4%

22.5%

7.4%

Equity LifeStyle Properties (NYSE: ELS  )

2.2%

74.1%

33.3%

(6.9%)

Source: Capital IQ, a division of Standard & Poor's. Sustainable dividend growth assumes constant payout ratio.

UPS and Delhaize have increased their dividends at a respectable pace over the past five years, and their sustainable dividend growth rates indicate that they will be able to support comparable growth in the future. Equity LifeStyle Properties, meanwhile, has been fast and furious with dividend increases since 2005. But a disparity between its FCF payout ratio and its earnings-based counterpart suggest that it's come too far too fast and that its supersonic dividend growth needs to take a pause.

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.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jim Royal, Ph.D., does not own shares of any of the companies mentioned. United Parcel Service is a Motley Fool Income Investor recommendation. The Fool owns shares of United Parcel Service. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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