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Cramer’s been talking a lot about dividend-paying stocks recently, but for Tuesday’s show he wanted to go more in depth than he has so far. The goal was to emphasize not just why these are the best investments in this tough market, but also how to find and buy them.
Let’s start with the basics and get the theory behind this thesis. Dividend-paying stocks offer consistent performance during good times and bad. In fact, investors can still make money regardless of whether the stock goes up or not. As long as those dividends are reinvested – and this is the most important part of dividend investing – meaning the money is used to buy more shares in the company, investors can usually expect a good return.
Here’s an example: A stock with a 4% dividend yield bought in 1998 would have returned 48%, even if the stock itself stayed flat for 10 years, as long as the dividends were reinvested.
This is the magic of compound interest – you earn interest on the interest you’ve already earned. Or in this case, you earn a dividend on shares you bought with the money from a previous dividend.
Look at Duke Energy [DUK
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]. This utility, which is a type of stock that works during a recession, yields about 5.9%, and Duke not only has been paying its dividend consistently for 82 years but also increased the payout this year. (Cramer recommends looking for companies with a history of raising their dividends.) Investors who buy Duke at its current yield level and reinvest the dividends will double their money after 12 years, again even if the stock stays flat.
Cramer dropped this fun fact on viewers tonight: Since January 1926 about 40% of the total return form the S&P 500 has been through reinvested dividends. So in both good times and bad, those dividends should account for about half of an investor’s profits, probably more so during downturns like the one we’re in now.
Now you know why Cramer said dividends are the single best way to invest in this tough market. So let’s turn the focus to what stocks to look for and how to buy them.
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