In the past few years, shareholders have begun reaching for yield because rates have been so low. While younger investors are interested in growth stocks because they have the most opportunity, older investors cannot afford to take as much risk. Instead they search for stocks that give them capital preservation and yield.
That means stocks with hefty, stable dividends like Procter & Gamble, Kellogg and Pfizer have become widely popular. Some people looking for yield could also go into emerging market bond funds with outsized returns. However, if the bond market provides higher yields when interest rates go up, that could shatter these high-yielding options.
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A quarter point raise from the Fed won't be enough to provide a better return initially, but if the Fed executes multiple rate hikes, that could be a different story.
Cramer warned against stocks that have to borrow money to pay for their dividends. The risk is too high because when the Fed starts to tighten and the company's business isn't doing well, then the dividend could get slashed. Kinder Morgan is an example of this situation.
"Kinder's become the benchmark of a bad stock … Dividends funded by debt are just too risky from now on," Cramer said.
This explains why so many investors have been so skittish in the past three sessions and why press reports on Thursday that said the Fed would be very slow and very deliberate with its rate hikes reduced the urgency to get rid of these high yielding stocks.
"If you are in these kinds of income producing stocks because you are reaching for yield, and not because you believe in the underlying business? I think you should sell some of them right into this strength," Cramer said.
Cramer suggested as much as a quarter of the high yielding stocks like Procter & Gamble, and half of anything that looks like Kinder Morgan, and the entire position of an emerging market bond fund.
Ultimately Cramer wants investors to get used to this parlor game of betting on rapid rate hikes versus a one-and-done approach. There is always risk to the stock market, and the key is to prepare your portfolios on good days like Thursday.