The 4% Club

We’ve been granted a reprieve, even a bounce today, since last week’s correction. But Cramer isn’t convinced that the sell-off will truly come to an end any time soon. To protect against more downward pressure, he recommends a trampoline – a 4% dividend yield that, after taxes, beats the return you’d get from treasuries.

So for lack of a better name, Cramer is inaugurating the first members of The 4% Club. The existence of this club is predicated on two concepts that are unique to Mad Money.

First, a 4% yield now compares favorably to the longer bond rates and will compare even more favorably to the cash rates when the Fed starts cutting rates, something Cramer expects to happen at least twice this year. From an income perspective, it’s better after taxes to own stocks with 4% dividend yields than to hold cash or treasuries. That makes these stocks more attractive. It keeps them from going down too far in the event of a harder sell-off.

The second idea is that most stocks get cheaper when they decline. Shocking, but true! The exception to this truism comes when a company’s book is overstated or its earnings power is impaired. Right now we see these exceptions in the financials because of the working-poor loan crisis.

Membership in this exclusive club doesn’t come easy. Cramer screened for stocks that took a price beating during the sell-off that drove their dividends, which rise as the stock prices come down, over 4%. Thirteen names came up. Cramer immediately ruled out the six financials because of the trouble in the mortgage-related credit market – even Wachovia, which he likes. The five utilities got dropped as well because Cramer doesn’t think there’s enough upside in any of them to justify a recommendation.

The only two that made the cut were Packaging Corp. of America and BP. PKG is a paper company with a pristine balance sheet and real earnings momentum, coupled with real stock momentum, in an industry ripe for consolidation. There’s also some private equity interest. Cramer’s bullish about this company and says he’d buy it hand over fist.

BP is Cramer’s favorite club member, though. It’s the first of the major oil companies to hit the 4% level. The stock’s had a seemingly endless parade of bad headlines—an exploding refinery, holes in the pipeline, but Cramer is chalking that up to the previous management and really bad luck. Besides, after years of spending money to find oil, BP has decided to cut back and go for value. It’s in a position to do that because it replaced its reserves aggressively – 11% – that’s among the highest in the industry, and it comes after years of sub-par replacement. Also, refining margins are expanding dramatically year-over-year, and BP’s management wants to make something happen to bring out value.

Bottom Line: You want to join The 4% Club, and there’s no doubt that BP is Cramer’s favorite member.

Questions? Comments?