A Warning to Dividend Investors

During Tuesday’s Mad Money, Cramer took a look at what he called “some of the big-picture roadblocks to investing success.” One of the biggest? Government, both foreign and domestic.

For part two of his weeklong stock-market survival school series, Cramer wanted to alert viewers to all the trouble that the US and, if you’ve been watching the news lately, European governments can cause and might continue to cause in the future. Specifically, he wanted to describe the negative affects that the feds here could have on dividend-paying stocks, one of his all-time favorite investments.

Next year President George W. Bush’s tax cuts will expire, sending the tax rate on dividends and capital gains soaring from its low 15% level. While Cramer wasn’t predicting an out and out sell-off, he said it’s very likely that money managers will unload their dividend holdings before the expiration. And why not? They’ll need the money, and the tax-friendly gains they once enjoyed will be gone.

Remember, these money mangers buy and sell in such high volume that that literally set stock prices for the market. So if they dump shares en masse, everyone is affected. Again, no one knows how this will play out, but owners of dividend stocks should take note. In fact, they might want to move their div plays into a tax-deferred IRA.

Even despite the potential tax increase, though, Cramer still likes dividend stocks. Especially the accidental high-yielders he’s been recommending. Because at the end of the day many of them will still yield more than US Treasurys, while both will be taxed at the same rate. And don’t forget about the power of compounding reinvested dividends, which have generated 40% of the total return from the S&P 500 going back to 1926.

Another potential government-caused downside of owning dividend stocks is the US federal deficit. As that increases – and Cramer is a lot less worried about the deficit than many on the Street – the government could start selling more and more Treasurys to raise cash. That could result in higher interest rates on those bonds, making them more attractive than dividend yields.

In general, Cramer wanted investors to keep a close watch on all initiatives coming out of Washington these days, as President Obama tries to push through cap-and-trade, “card check” legislation and financial regulation. (We’ve already seen the effects that health-care reform had on the markets.) Cramer said he’s far less bearish about these potential changes than others, but investors need to keep these potential risks in mind.

What about Europe? Well, Germany is banning naked short selling on a number of stocks and government bonds. That’s, in fact, a good thing, but it unfortunately projects the idea that the country is preparing for Lehman Brothers II, as that company was largely driven out of business by naked short sellers. Hence the market’s drop on Tuesday.

And the European Union’s debt problems are still front and center, too. Granted, Cramer’s fully confident that the trillion-dollar bailout package will work, but let’s not forget the effect that Greece, Spain and Portugal had on American stocks. This is especially important because Cramer recommends keeping 10% to 20% of your portfolio in foreign companies. So you always want to keep track of what’s happening with governments overseas, especially Europe, because they matter to our markets.

Cramer’s bottom line tonight was that investing means knowing more than the just fundamentals of individual companies.

“You also have to watch the actions of our government and foreign governments,” Cramer said. “They have now become the biggest obstacles in the way of trying to make a profit in the stock market.”

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