Cramer's 'Mad Money' Recap: Using the Right Investment Tools
While dividend stocks might not seem sexy, Cramer said that, put simply, dividends make money. In fact, nearly 40% of the total gains from the S&P 500 since 1926 have come in the form of dividends. Over the past decade, that percentage is even higher.
Dividends aren't merely safety plays for retirees and cautious investors, said Cramer, they are a smart strategy for making money. He explained that as a stock price falls, its dividend yield increases, which in turn makes in more attractive to investors. Stocks that hit a 4% yield represent terrific long-term bargains, he noted, which is why stocks typically stop going down once they hit 4%.
But beyond making money, Cramer said that dividends, and especially dividend raises, are management's way of telling investors that things are going well at the company. A solid, steady dividend that gets raised regularly is a hallmark of a company that's stable and doing sell.
Not all dividends are created equal, however, cautioned Cramer. He said that dividend yields that are not sustainable are red flags. Just look at what happened to Radio Shack(RSH) and supermarket SuperValu(SVU) in early 2012 for a lesson in dividends gone awry.
Cramer said that a company's earnings per share should be at least twice that of its dividend payout to be considered safe. For companies with high capital needs, like telecoms, he said investors can look at the cash flow as another metric to see whether the dividend may be in jeopardy.
Looking for Growth
Next up in Cramer's toolbox of investing tips, growth stocks. Stocks like Apple, Whole Foods(WFM) and Amazon.com(AMZN) all fit this category, said Cramer, as do many biotech names like Amgen(AMGN) and Celgene(CELG) .
Growth stocks will hit new high after new high as long as their growth continues. That's because stock prices represent what investors are willing to pay for future earnings. So as a company's earnings grow, so does its share price. Cramer said that as a rule he's willing to pay up to two times a company's growth rate. So for a company growing 20% a year, he's willing to pay up to 40 times their earnings. Growth stocks typically won't trade below one time their growth rate unless something is going wrong.