Cramer: Buy Eaton for Its Dividend

Wednesday, 22 Oct 2008 | 7:28 PM ET

Cramer continued his series on dividends Wednesday, focusing this time on industrial company Eaton.

Yield To Maturity
How to avoid getting annihilated and maybe even make some money in this negative environment, with Mad Money host Jim Cramer.

Yesterday, Cramer explained why dividend stocks work right now and how to find the perfect one. Investors want that cash cushion for protection in this tough environment. They should look for companies that have been beaten down by the market and are now offering decent yields, as well as businesses that can withstand a recession.

In Eaton's case, the stock's dropped $60 to $39 a share, sending the yield up to 5%. And while the company makes products normally hurt during a downturn – electrical systems, hydraulics, auto transmissions – CEO Sandy Cutler has taken measures to protect his company (and shareholders) against this mess we're in.

Cutler used an April offering to pay down debt, strengthening the balance sheet in anticipation of this downturn. When he appeared on Mad Money back in July, he was still focused on signs of market trouble. Eaton can slow its production rate down enough to survive a prolonged economic contraction, and overall the company has shifted its business away from domestic autos to electrical components and markets overseas. So Eaton's better positioned to ride out this tough market.

So how do you buy Eaton? Cramer recommended the same scale-down system he mentioned Tuesday. Buy a quarter of a position at present levels, and then wait for the stock to drop to $36.36, where the yield will be 5.5%. Once ETN gets to $33.33, the yield will be up to 6%, and so on.

The thing to keep in mind is that you don't want to buy this stock if it goes higher. Once Eaton gets to $50 a share, the yield drops to 4%, and that's nothing compared to other dividends in the market right now. So consider buying Eaton as it goes down, Cramer said, but sell the stock if it goes up.

Watch the video for Cramer's "Rule of 72" and the full story on Eaton.

Questions for Cramer? madmoney@cnbc.com

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