CNBC’s Jim Cramer urges investors to have a game plan with a rate hike on the horizion.
Investors could see a quarter point rate hike, and then a forceful statement from the Fed that nothing will happen again unless there is concrete evidence that U.S. job growth is accelerating, he told CNBC.
"I think we need to discuss why it both is and isn't a dumb parlor game that we have to put up with because of the opportunities it might give us if we are good and ready," the "Mad Money" host said.
"If you are in these kinds of income-producing stocks because you are reaching for yield, and not because you believe in the underlying business? I think you should sell some of them right into this strength," he said.
“In the past few years, shareholders have begun reaching for yield because rates have been so low. While younger investors are interested in growth stocks because they have the most opportunity, older investors cannot afford to take as much risk. Instead they search for stocks that give them capital preservation and yield,” CNBC explained.
“That means stocks with hefty, stable dividends like Procter & Gamble, Kellogg and Pfizer have become widely popular. Some people looking for yield could also go into emerging market bond funds with outsized returns. However, if the bond market provides higher yields when interest rates go up, that could shatter these high-yielding options,” CNBC explained.
Cramer warned against stocks that have to borrow money to pay for their dividends. The risk is too high because when the Fed starts to tighten and the company's business isn't doing well, then the dividend could get slashed, CNBC explained. "Kinder's become the benchmark of a bad stock … Dividends funded by debt are just too risky from now on," Cramer said.
"If you are in these kinds of income producing stocks because you are reaching for yield, and not because you believe in the underlying business? I think you should sell some of them right into this strength," Cramer said.
Meanwhile, Michael Johnston of Dividend Reference
explains there are six financial metrics to evaluate high-yield dividend stocks.
The six metrics:
- Revenue Growth
- Profit Margins
- Payout Ratio
- Cash and Debt
- Stock Price Volatility
- Buybacks and Insider Trades
- Puzzle Pieces
“Evaluating high-yield dividend stocks is a complex task that rarely reveals an easy answer,” Johnston writes.
“In many cases, the metrics highlighted above will give conflicting indications about the health of a company. But investors who conduct a thoughtful analysis will be more likely to steer clear of the yield traps out there and focus in on the attractive buying opportunities.”
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