Investors need to own at least one stock with a big, high-yielding dividend, Jim Cramer said on CNBC's "Mad Money."
"I know dividend-paying stocks may not be what most people consider sexy, but you know what? Dividends make you money," Cramer said. "And to me, that's the definition of sex appeal."
The "Mad Money" host said that buying high yielders and then reinvesting the dividends is "one of the greatest, most reliable ways to make money out there." It allows one's investment to compound over time, meaning the money from your dividends pays dividends. Although some think high-yielding stocks are to generate income for retirement, but Cramer said that since January 1926, roughly 40 percent of the return from the S&P 500 came from reinvested dividends. He thinks high yielders are safe because as the share price falls, the yield increases and eventually gets to a level where it’s too attractive for investors to ignore.
Cramer also likes accidental high-yielders, which are stocks that yield more than 4%. When their share price falls, the yield increases. That's why he likes stocks of companies that have recently raised their dividends, as a dividend hike is one of the clearest signals management can send about the strength of the business.
"A company that can raise its dividend is one that has steady, reliable growth," Cramer said. "Equally important, it’s a company that you can be pretty darned sure won’t be cutting the dividend anytime soon."
When it comes to high-yielding dividend stocks, Cramer said that while high yields are attractive, it can also be a sign that the dividend is unsustainable and will have to be cut. To determine whether or not the dividend is safe, he recommends looking at the earnings per share. If a company has earnings that are greater than twice its dividend payout, Cramer said it can likely sustain the dividend even in lean times when the earnings shrink. If the earnings aren't greater than twice the dividend payout, look at the cash flow. Companies with a lot of depreciation and amortization costs will likely have lower earnings. It's also important to examine the balance sheet to ensure there isn’t a lot of debt coming due in the near future that could necessitate a dividend cut, he said.
To collect the dividend, Cramer said the only date you should care about is the "must own" date. This is the last day you can buy a stock to claim its next dividend payout and it's always the day before the ex-date.
"You absolutely must own a high-yielder," Cramer said. "Dividends protect your stocks, and they’re also a terrific way to make money."
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