How to Find the Perfect Dividend Stock

Dividend-paying stocks worthy of investment have to satisfy certain criteria, Cramer said during Tuesday’s Mad Money.

Cramer used today’s show to go deeper into not just why investors should look for companies with quarterly payouts but also how to go about finding and buying them. He laid out a few requirements everyone should keep in mind:

  • A high yield is great, but make sure the company has the cash to maintain its dividend.
  • Look for companies that have a record of increasing their dividends
  • And if possible, look for companies that have a history of special dividends, which are rare payouts to shareholders when management decides it has the money to do so.

Cramer likes Nucor for those reasons. Ordinarily, he wouldn’t recommend such a cyclical stock for fear the company would have to cut the dividend when the market turned sour. But even in the worst environments Nucor has returned money to shareholders, so investors most likely can assume the dividend’s safe. (For more on that, check out Cramer’s interview with Nucor CEO Dan DiMicco.)

Nucor’s been increasing its regular dividend, Cramer said, and paying out special dividends consistently since 2005. Those specials might fade out through 2009 given the economy, but the flip side is that NUE has been hit so hard, sending the stock down, that investors are getting a great deal anyway.

Here’s a quick look at the power of Nucor’s dividend: Investors who bought the stock in 2004 would be up 157%. Those who reinvested the dividend, though, would be up 199%. Compare that to an investor in the S&P 500 over the same period, who would have been down 14%, or 6% if they’d reinvested their dividends.

Investors looking to “trade around a core position,” something Cramer recommends during volatile markets, would take their 200 shares and sell in increments as the yield decreases. But this is only for those looking for short-term gains.

If you’re just looking for a good stock with a solid dividend, then follow Cramer’s advice on buying Nucor as the share prices shrink but the dividend yield goes up.

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?