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Cramer: Buybacks or Dividends – Which is Better for You?

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With so much cash on the balance sheet it seems these days you're always hearing about more buybacks or an increased dividend.

But if you're looking to put money to work, which is better?

"Companies have become enamored of buybacks as a way to return money to existing shareholders," said Cramer.

Sixty companies in the S&P 500 announced share buyback programs worth at least $1 billion in 2012. Within the group, the biggest buying back came from Johnson & Johnson, repurchasing $12.9 billion worth of stock.

And although a buyback can drive shares higher, as a strategy Cramer doesn't love it.

If you're a buy and hold retail investor, Cramer feels a buyback could go against you. That's because a buyback gives pros a reason to sell.

Confused?

The buyback conceivably drives shares higher. And as that happens, pros will often take gains and then put money to work, elsewhere. There's no reward for holding.

By comparison, dividends boost return to existing shareholders while simultaneously attracting new buyers. Therefore investors are inclined to hold while new buyers establish positions.


Ann Cutting | Photographer's Choice | Getty Images

Also, "Dividends are a much better sign that the management believes in the future than a buyback because buybacks typically end. Management is typically reluctant to take back a dividend– they are an out-loud declaration of long-term confidence," he said.

In addition, Cramer likes dividends as a way to navigate low interest rates.

"Dividend yield can provide a rate of return that savings accounts or certificate of deposits just can't," Cramer said.

Of course, the Mad Money host realizes that stocks present more risk than savings accounts or CD's but he feels relatively stable companies that pay dividends present a relatively safe way to invest.

"And if you reinvest those dividends you can augment your return to the point where you are far exceeding a return on bonds," Cramer said

In fact, Cramer said that dividends are so important that they have been responsible for almost 40% of the S&P 500's return in the last ten years.

And he likes the overall risk/reward in owning the shares, outright.

"Yes, those stocks can go down. But they can also go higher," he added.

"These days if management is looking to increase shareholder value and they don't suggest increasing the dividend, then count me out," said Cramer.

Dividends are that important. Buybacks, not nearly as much.

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