The Dos and Don’ts of Dividend Investing

While most investors know about dividends, few seem to understand how they’re paid out. Cramer said Monday that he’s been getting lots of questions about this very subject, so he wanted to clarify things for the viewers at home.

Pepsi pays a 42.5-cent quarterly dividend, which right now makes it a 3.5% yield, and the next payout happens on March 31. When management declared this dividend last month, it said the “record date” was March 6. Investors don’t really need to know what a record date is, Cramer said, just the date on which it falls. The important thing is what Cramer called a “must-own date” – his term, not the Street’s – which falls three days prior to that record date. So anyone who wants in on the end-of-month dividend needs to buy PEP by close of trading on Tuesday, March 3.

There’s also something called the “ex-date,” which investors might see rather than the record date. The formula for finding the must-own date then becomes the ex-date minus one. The ex-date for Pepsi’s dividend payout is Wednesday, March 4. So again, the cutoff for getting in is March 3.

What’s interesting is that investors don’t even have to hold on to their PEP shares all that long to collect the dividend. In fact, you can sell the very next day, March 4, and still get your money. The stock will open about 42.5 cents lower on Wednesday to reflect that new buyers no longer have any right to that dividend.

Pepsi expects to increase its dividend again in May – the 37th consecutive year – and the company has both the earnings and cash flows to make that payment. But Cramer likes PEP for much more than the dividend. This is a business that’s been generating organic growth despite the recession, whose overseas sales are still on the rise, that’s opening new plants in China and should see $7 billion in cash flows in 2009. There is some concern about the North American beverage business and the strong U.S. dollar, but Cramer seems to think the worst in these areas is behind Pepsi for now. And the company’s doing much better in terms of dollar exposure than Coca-Cola.

Lower commodity costs in the latter half of 2009 will boost margins, and the $1.2 billion reinvestment plan will put Pepsi in better position to exit this recession stronger than its competitors. The stock’s trading at 13 times earnings, which is a 20% premium to the market, but Cramer thinks it’s worth it. PEP has steady earnings, sales growth, strong cash flow, great cost management and great management all around in CEO Indra Nooyi. And regardless, Pepsi has traded at a 30% premium to the market over the past two years, so right now investors are getting this stock at a discount.

Just be sure to buy in increments, Cramer said. As much as he likes Pepsi, he thinks this volatile market could still push the stock lower.

Cramer’s charitable trust owns Pepsi.

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