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 |
|---|---|---|---|---|
|
Procter & Gamble |
3.2% |
11.8% |
40.3% |
10.1% |
|
Annaly Capital Management |
15.2% |
8.9% |
139.7%* |
(4.6%) |
|
International Bancshares |
2% |
9.3% |
NM |
7.7% |
Source: Capital IQ, a division of Standard & Poor's. Sustainable dividend growth assumes constant payout ratio.
*Net income payout ratio. NM = not meaningful; International Bancshares had negative free cash flow.
All three companies here have grown their payouts substantially over the last half-decade. Procter & Gamble also has a high sustainable growth rate, and its moderate payout ratio suggests it has room to raise its payout. While International Bancshares has grown its dividend, it has actually been burning free cash flow over the last year, even as it declared net income.
Annaly offers a very high dividend yield, and has shown a lot of growth over the past five years, but its sustainable growth rate indicates that it may have to reduce its dividend in the future. Still, it looks like the company will be able to pay out hefty cash as long as the housing debacle continues, which is one reason my Foolish colleague Ilan Moscovitz selected it for the Motley Fool's 50 Stocks in 50 Days campaign.
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.
