Cramer: Buy Dividends on This Dow Drop
Investors might be scared when the Dow drops another 733 points, as it did Wednesday, testing the Oct. 10 lows, but a few key things have changed over the past week that should ease their fears, Cramer said.
Following Europe’s lead, the U.S. government backstopped the debt of major banks, gave them billions of dollars to keep their doors open, and the FDIC announced it will fully insure all non-interest-bearing accounts. Before this deal, Citigroup, Morgan Stanley and Goldman Sachs were all asking themselves some very existential questions. That’s no longer the case.
As a result, now that the possibility of another Great Depression has been taken off the table, Cramer’s thinking that stocks with high dividend yields – so long as the companies can pay them without borrowing – might work here. And there are more of these names now that market’s hammered down their share price. Jones Apparel pays out 6%, DuPont and Philip Morris more than 5%. Joy Global’s worth just a few hundred million dollars more than all of the stock the company’s buying back. These companies should withstand their Oct. 10 lows, Cramer said, so they’re worth a look by any investor looking for a play in this market.
The focus here is on dividends and not earnings. Cramer doesn’t trust earnings estimates right now. Instead, look for a stock that pays out about 4% to 5%. That’s a good cushion to help ride out the volatility we’re seeing. Apply the same scale-down principle Cramer endorses when buying stocks based on share price, but this time focus on the dividend. As the yield goes up, buy more stock.
Don't get Cramer wrong: There are still plenty of bad omens in the market. Some earnings reports have been worse than expected, the Baltic Dry Index is still sinking fast, and commodities have done the same. But Cramer said a year from now the very industrial companies he’s recommending now should be in better shape. We should see signs then of the money being injected into the system now, and that’s a reason to be a buyer.
Cramer also stands behind his previous call to own stocks that make products you can eat, drink, smoke, wash or medicate with, as well as those that trade near their liquidation values.
He also still believes wholeheartedly that he was right to urge people to raise money to cover their costs over the next five years. And he wants investors to sell 20% of what the stocks they own in order to keep cash on the sidelines. When it’s time to buy again, you want that money on the ready.
Besides, Cramer said, you probably don’t want to own any stock without a dividend until the S&P 500 reaches 830 and the Dow’s at 8,000 anyway. This market's just too treacherous.
Jim's charitable trust owns Morgan Stanley and Goldman Sachs.
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