The markets are full of polarizing characters. Icahn, Chanos, and even Warren Buffett all have their disciples and skeptics.
One of the most polarizing figures is Jim Cramer. People certainly have a love/hate relationship with the market commentator and Mad Money host. I have yet to meet someone who doesn’t have a strong opinion of him one way or another. (Personally, I think he’s entertaining.)
Most of that hatred stems from the perceived flip-flopping of his picks, thanks to the rapid-fire nature of his show. But if you can get passed the shock-jock sound machine, strobe-lights, flying squeezy bulls and CEO Wall of Shame, Cramer actually spits out some good advice. Seriously.
And one of his greatest pieces of advice makes perfect sense in today’s volatile and crazy markets.
An Accidental Situation
After several years of bull markets, it’s hard to remember the panic that was going on during the beginning of the credit crisis and recession back in 2007 and 2008. Bear Sterns and Lehman Brothers were failing under the weight of bad debts. Bank bailouts made headlines every day, and the markets dropped — by a lot. The Dow bottomed out at 6,547.05, about 54% lower than its previous record high of 14,164.
And while everyone was focusing on this clip of Cramer, he quietly gave some great advice on his show a few weeks later: buy stocks, but don’t just buy any stocks, buy accidental high yielders.
Market panics and severe drops create unique opportunities for investors willing to go against the grain. As they say, “Buy when there is blood in the streets.” One of the places investor should look is dividend stocks.
The concept of an accidental high yielder is pretty simple.
They are good, quality firms whose dividend yields would not be that impressive if it weren’t for the fact that their share prices have been pushed down with the rest of the market. Essentially, widespread panic selling pushes up the yields on such stocks to pretty insane levels, even though the underlying dividend payment, or much of the stock’s long-term story, never changed. Was General Mill’s (GIS ) going to stop selling cereal because Bear Stern’s went under? No. That’s because most accidental high yielders are the bedrock of America.
During the panic of 2008-ish, dividend stalwarts like Honeywell (HON ), Heinz (KHC ) and John Deere (DE ), were paying dividends in the 4% to 7% range. Historically and before the crash, you were looking at yields in the 2% to 3% range for many of these names.
And Cramer said to buy them with two fists.
It proved to be one heck of a portfolio move. Not only have many of these stocks gone on to eclipse their prerecession highs, but their dividends have increased as well. Had you bought, your yield on cost would now be exponentially higher and total returns would be insane, even more so had you reinvested the dividends along the way.
Buying good, quality dividend payers during the panic could have been a life-changing event.
Get Ready for Round Two
Hopefully, we’ll never have to deal with the kind of doom and gloom that was the Credit Crisis again. But I’m fairly confident that we’ll have another recession and major correction in the future. Heck, the way the market is moving lately, we may be having one now.
The beauty of Cramer’s accidental high yielders recommendation is that the market doesn’t have to plunge 54% for it work, nor do you have to time it just right at the bottom. Buying General Mills on the first day of 2008, which isn’t even at the lows of the crisis, would have snagged you a 120% gain. And that doesn’t include dividends or the reinvestment potential of those dividends.
The point is that when the market pukes out 300 or 400 points, snag some shares of a quality firm whose dividend yield has just gotten that much juicer. Over the longer haul, I’d be willing to bet that you’ll make out like a bandit.
Incidentally, Cramer has gone on the air recently touting his accidental high yielders recommendation in the current market malaise. I would suggest ignoring the cowbell and buzzer noises to pay attention at least this time.