The safety dance

Buying stocks with accidentally high yields can keep you above water.

By Jim Cramer Feb 11, 2010 8:25AM
Jim Cramer

By Jim Cramer, TheStreet

 

Is it too hard? Has it become too hard?

 

Yes and yes.

 

That's right, this market has become too difficult to fathom on a given day. We know that. We wake up and we see the oil futures up 50 cents and we think it is going to be a good day and then they dip 37 cents and we know that it is going to be a bad day. Dollar down the equivalent of a penny, something we would leave in a cup, because of some motivated seller or a short-sell? Dump everything because of that penny. Someone big liquidating gold? Sell all the stocks that do well in a deflationary environment. Yeah, it is that stupid.

 

Sell, sell, sell.

 

When this happened in 2008 and early 2009, I simply refused to recommend a stock on my show unless it had a solid dividend, one that seemed outsized vs. the historical average. These were not just historically high dividends, they were hysterically high yields.

 

I did the same in the book Getting Back to Even.

 

I think we are rapidly heading back into that pattern.

 

How does this play out in reality? Let's take Chevron (CVX). This stock is now ridiculously cheap, having dropped 8 points on a $4 drop in oil.

 

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But right now it is in no man's land. It yields 3.8%, where we already bought some for Action Alerts PLUS, and now it is time to wait.

 

Until when?

 

Until it yields more than 4 and change, maybe 4.25%.

 

Just a benchmark, but in this kind of horrible market you need a touchstone. It is just too hard to go buy many inconsistent stocks -- ones connected to the gold/oil/dollar complex without a touchstone.

 

You need that protection.

 

Doesn't mean you have to overlook the dividend issue entirely. I listened to conference calls the other day, Disney (DIS) and Coca-Cola (KO), and I liked Disney much more because the movie slate should be huge for them. Huge. There's so much in the pipe.

 

But you know what? If you put a gun to my head I think I would rather buy KO because it has a 3% yield and I know I could start buying it here and buy more at 3.25% and then 3.5% ... and if it got to 4%, well, godsend.

 

It just seems reckless to go and buy Disney without that protection right here, just go out and buy it, when you know if the stars are not aligned -- gold/oil/dollar -- you will have overpaid from the get-go.

 

Is 3% enough to stop an onslaught? No. But think of it like this: The only strategy that kept you in the game without getting you murdered in the second half of 2008 and the first part of 2009 was buying the stocks of companies with historically chintzy dividends, prudent dividend-payers, that suddenly had bountiful yields. You buy them on a scale, and then you sell them when the bounce back, also on a scale. The worst that happens -- as was the case with many Action Alerts PLUS names bought with this method -- is that you get a high-yielding stock that beats cash.

 

Call it chicken investing. Call it simple.

 

I just need to call something safe.

 

And accidentally high-yielding dividends could be the safest game back in town.

 

At the time of publication, Cramer was long Chevron.

 

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

 

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