There was talk today that the Federal Reserve would cut rates even before its Sept. 18 meeting. If that happened, dividend reinvestment could be a better strategy than cash or CDs.
A Fed rate cut decreases the amount of interest investors can get on cash. That’s why, relatively speaking, it then becomes more profitable to put money into dividend-paying stocks, Cramer said.
He likes Procter & Gamble. It only pays 2.2%, or $1.40 a year, but investors can make some money if they reinvest in more PG stock.
Procter & Gamble is at $64 and change now but was at $30 in 2000. A stockholder would be up $34 today, plus $7.69 from reinvested dividends.
“Reinvesting your dividends is like earning compounding interest on money in the bank,” Cramer said. “It’s the exact same process of compounding that makes you more money than the mere 2.2% yield that you’d expect if you buy Procter and hold it for a year. This how I need you to look at stocks that pay dividends.”
There are a couple of other reasons Cramer likes P&G: It’s is a great defensive stock just in case the Fed takes too long to cut rates and the economy slides into a recession. And it has what Cramer called a “mega-buyback.” By 2010, the company will have bought back about 15% of its market capitalization, he said.
“It might not be sexy,” Cramer said, “but for long-term investors, Procter & Gamble and dividend reinvestment are a great combination.”
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