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Avoid 'Stupid' Speculation

Speculation is a great way to make money, Cramer said Tuesday, but buying a stock because you got a tip and the product seems sexy is just stupid.

Not every company can be an Apple , Cramer explained. Shares of Sirius Satellite Radio, for example, was endlessly pushed by people. Many retail investors said it had to be bought because it was sexy, low-priced product that would soon wipe out traditional radio. Those who bought shares of the company five years ago at $6.08 have watched it fall 77 percent to its current share price of $1.35.

Those losses were entirely avoidable, Cramer said. If investors had done their homework—at least one hour of research per week—they would have realized Sirius was a "lousy" investment. The satellite radio seemed cool, but Sirius wasn't making any money. The company was spending money and accumulating debt. To stay afloat, it announced plans to merge with competitor XM Radio. Government regulators held the merger up for 17 months until it finally closed at end July 2008. It was the heart of the financial crisis and money was hard to come by. The merger wasn't profitable and had to be bailed out by John Malone's Liberty Media, which ended up with a 40 percent stake in the company.

When a stock is being touted, you should be suspicious. It's not fun, but you have to examine the aspects of the company's balance sheet. Cramer recommends looking for stocks that pay big, juicy dividend yields. That way, you know your investment is going to put money in your pocket year after year.

CenturyLink is a great example of a dividend paying stock. With headquarters in Monroe, La., it is the largest rural telephone company in the US. The stock pays a $2.90 annual dividend, which yields 7.3 percent. So while a stock like Sirius could lose you money year over year, CenturyLink pays you cash just for being a shareholder.

In the last five years, CenturyLink's stock went from $31.90 to $39.70 for a 24 percent jump versus a 2 percent decline in the S&P 500 during the same time. Cramer thinks CenturyLink has more room to run. The company has survived recent consolidation in the industry, continuing to provide phone, Internet and television services in 33 states. The business isn't exactly exciting, but Cramer thinks the stock's dividend is worth it. CenturyLink raised the dividend this year and he thinks it's likely to raise it again sometime soon.

"At the end of the day, you need some speculative picks," Cramer said. "But be smart when you speculate, don't just blindly follow tips. We saw where that gets you with Sirius."

When this post was published, Cramer's charitable trust owned Apple.

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