Sneak Preview: Know the Downside

Consider that Procter & Gamble (PG), for example, has traded for some time with a dividend of 2% and change. But that's because the value of the stock keeps going up along with the dividend. The same dollar amount of the dividend it paid in 2007 would have been a 5% dividend if the stock were still selling at its 2000 price. Dividends that grow are fabulous cushions; dividends that grow fast are trampolines.

Inside Cramer's New Book: 'Stay Mad for Life'

If a stock can't be saved by a buyback or a dividend, can it be saved by the multiple to earnings? You need to figure out if the company's growing faster than the average stock but sells at a lower price-to-earnings ratio than the average stock (as expressed by the average of the S&P 500).

If you have a company with a high price-to-earnings multiple and no dividend and a buyback that is not meaningful, to me that means you have a stock that could really gaff you if things go wrong at the company or things go wrong with the stock, even if the growth rate is high.

Watch for stocks that grow at a double-digit rate, but sell at single-digit multiples, and have big buybacks and good dividends. What -- you don't think those exist? Consider that was precisely the situation of all the major oil companies before and during their remarkable runs in the past decade. Often a stock that has a limited downside will gain tons of adherents, letting the upside take care of itself!

Editor's note: This is a special sneak preview of Jim Cramer's just-released book, Jim Cramer's Stay Mad for Life: Get Rich, Stay Rich (Make Your Kids Even Richer). Look for more sneak previews every day, and get your free copy with your annual subscription to Action Alerts PLUS; click here for details. Catch Cramer in person to get it signed Saturday, Jan. 12, at 1 p.m. in Westbury, Long Island's Costco.

Missed the first sneak previews? Read the book intro and the rules of getting and staying rich: Rule 1, Rule 2, Rule 3, Rule 4 and Rule 5. Know what pros do right and amateurs do wrong: Part 1, Part 2, Part 3 and Part 4.

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