Cramer: High Dividends Should Restore Trust in Stocks
What makes Monday's rally so bittersweet? The Dow and S&P 500 both closed up nearly 1%, but he knows that on the whole, people are getting out of stocks, instead of into them. People no longer believe in stocks, says Cramer, who says people see them as untrustworthy and "not a legitimate asset class." All this despite a 63% rally since March lows. So why are people pulling money out of stock funds and diverting their hard-earned cash into bond funds.
How can Cramer restore your confidence in stocks? One word: Dividends.
In fact, he thinks that when investors move their money into bonds or CDs they are, in fact, the ones being reckless. With low returns on CDs hovering around 1.5% and the Treasury yields on 10 year notes at 3.54%, this is significantly less than you would be making on safe, high-yielding equities, advises Cramer, investment options which offer the possibility of capital appreciation and dividend raises. This is the key, he says, making the case that safe and smart investments right now are actually high-yielding stocks that have recently raised their dividends.
Take into account the Blackrock Dividend Achievers Trust says Cramer, which yields 7.6% and has a favorable tax treatment of 15%, instead of the 35% that income from bonds or CDs could be taxed at.
Aside from the tax advantage, Cramer points out that dividend stocks are the safest investment options out there, if you know how to analyze them. He reminds viewers that a dividend acts like a parachute, or at least a cushion, if you are worried about a falling stock price. It can even act as a trampoline, he says, because as a stock's price falls, the dividend increases, making the stock more attractive to other investors, a principle called yield support, which Cramer identifies as one of the best reasons to own dividend stocks.
Not to mention, high dividend stocks are less subject to short sellers because when someone shorts a stock, they become responsible for paying the dividend to the person they sold it to, which eats into their profits and makes it less attractive.
But most important, says Cramer, is that dividend stocks are normally held with more of a long term philosophy, provided that the company can maintain their payouts and continue to raise them. Over the last 80 years, reinvested dividends accounted for 40% of the return from owning stocks, he says. If you reinvest your dividends and allow them to compound over time, you now have the potential for incredible returns, even if the stock price stays flat.
With the yield from the Blackrock Dividend Achievers Trust, Cramer points out that the 7.6% yield allows you to double your money in 9.5 years, as long as you reinvested your dividends, even if the fund went nowhere—it would take over 20 years for you to get the same return from treasurys, he says.
What's the bottom line? Don’t be scared of stocks. It’s downright irresponsible to invest in bonds or CDs right now, says Cramer, and there are a multitude of high yielding stocks with even higher potential in the future if these high dividends are raised. In the first installment of a multi-part dividend series, Cramer lays out his favorite 3 high yielding dividend stocks right now.
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