Finding Safe Dividends

Cramer started Wednesday’s Mad Money insisting again that investors not buy dividend-paying stocks unless those dividends are safe. There are plenty of good-looking yields out there, but many can’t be trusted in an economy like this.

So how do you know whether or not to trust a company’s payout? Cramer has a couple of important rules.

1. Stay away from companies whose expected earnings for the year aren’t at least double the annual dividend. Freeport-McMoRan was issuing $2 a share to stockholders, but the recent downturn cut their 2009 EPS projections to 94 cents a share, just under half the dividend. So it’s no wonder the company recently suspended that payout entirely.

2. Cyclical companies are more vulnerable to market volatility, and therefore are more likely to cut their dividends when the economy tanks. FCX falls into this category, too, as do housing name Lennar and gambling outfit Boyd Gaming. The same goes for the financials. If the big bank CEOs can’t count on a bonus, Cramer said, you shouldn’t count on a dividend.

Usually, the most dependable payouts are from companies that have been consistently raising them for 40 or 50 years. But even then you can’t be sure. Masco, maker of cabinets and faucets, has upped its dividend every year for 49 straight years. But housing is a tough business to be in right now. And while the company seems committed to its dividend, Cramer thinks a cut is all but inevitable, especially when you consider Masco’s enormous 108% debt-to-equity ratio.

So the Mad Money mantra for the time being is this: No company’s stock is worth owning unless it can be defended with a dividend. Keep that in mind as you hunt for returns in this tough market.

Did you know that back in 2003 Cramer played a key role in lowering the tax rate on dividends? At least that’s what he says…Check out the video to see how it all went down.

Jim's charitable trust owns Freeport-McMoRan.

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