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On Monday's show Jim talked about the idea of accidental dividends. This is a new name on a concept we've been kicking around for a few weeks: stocks that have really high yields, not because they decided to pay out a huge dividend, but because the share prices have come down so hard, so fast that the stocks turned into high-yielders without even trying.
Terra Nitrogen [TNH
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], a fertilizer company that has a yield so high that it will still be enormous even if the company cuts the dividend, is the latest addition to Cramer's list of stocks with accidentally high dividends.
Now, last week we gave you a guide to figuring out whether or not a company's dividend was safe, using Verizon [VZ
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] and Masco [MAS
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], two companies that had recently raised their dividends as examples. We said that if its earnings per share come in at two or more times the annual dividend payout, then the dividend's safe. We also said you can make exceptions to this rule if you're looking at a company that generates lots of free cash flow and is very capital intensive, with depreciating equipment that makes the company's earnings lower but doesn't deplete its cash, and thus doesn't hurt its ability to maintain its dividend.
Not every accidental high yielder has a safe dividend, but many of them do. If you're looking for a good dividend-paying stock – and remember, those are Jim's first-tier choices for this market – you should go through some of the names we now would consider accidental high-yielders, companies like Eaton [ETN
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] and Nucor [NUE
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], and give them the dividend test we applied to Verizon and Masco. Remember to be conservative about next year's earnings because the analysts still need to cut estimates more than they have.
One more point: The higher this market goes, the fewer of these accidental high-yielders there are. And the ones that remain have lower yields, making them less attractive. That's part of the reason we've been recommending so many master limited partnerships, like Terra Nitrogen, and Boardwalk Pipeline Partners [BWP
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] along with Kinder Morgan Energy Partners [KMP
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]. These companies have to pay out almost all of their profits to shareholders, so their yields are enormous. If you're just looking for yield, for a stock that can pay you cash, these MLPs are a great choice even as the market goes higher.
Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Rich and Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.
Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.
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