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Cramer's 'Mad Money' Recap: Protecting Profits

How should investors gauge these red-hot stocks with seemingly unbridled share prices? Cramer said he's always willing to pay a multiple that's up to twice a company's growth rate. So for a company growing its earnings at 20% a year, Cramer said he's willing to pay up to 40 times earnings for it.

Investors must pay close attention to which way a growth company's earnings are headed, however. These high fliers can seem to soar endlessly if earnings are accelerating and analysts are scrambling to raise their estimates to fit that growth. But as soon as earnings slip and those estimates are not met, the downward gravitational pull can cause shares to take a pounding.

This was certainly the case with Apple throughout much of 2012 and 2013, said Cramer, and the same can be said for Chipotle, Blackberry (BBRY), Nokia (NOK) and Chipotle. When you see multiples compress, be prepared for a bumpy ride, Cramer concluded.

Unsexy Dividend Stocks

Cramer's next class of stock for a properly diversified portfolio is one that offers a high dividend yield. He said that while dividend stocks may not be as sexy as a high-growth name or a speculative stock, buying a high-yielding stock and reinvesting those dividends remains one of the best ways to make money, period. Since 1926, nearly 40% of the return from the S&P 500 has come from dividends, Cramer noted, so investors who ignore dividends ignore a huge chunk of earnings potential.

Why are dividend stocks such a good investment? Cramer said it's because a big dividend offers a cushion that helps prevent stocks in a big decline. As share prices fall, yields rise, eventually to a level where investors simply cannot say no. This trend prevents stocks with long histories of steady dividends and dividend raises from falling much below where their yields reach 4%. At that level, there always seems to be hoards of investors buying in.

Beware of stocks that have yields that are too high, however, Cramer cautioned. He said that in addition to a solid track record of paying and raising their dividends, investors need to see earnings that are at least twice the dividend payout to deem it a "safe" dividend. This rule can be broken for companies that have large capital investments and, therefore, large depreciation expenses, Cramer noted, as depreciation is not an expense that directly affects a company's cash flow.

Cramer's final word about dividend stocks is nomenclature. He said dividend stocks have a lot of dates, but the only date investors should be concerned with is what he dubs the "must own" date, which is the day before the ex-date, or ex-dividend date. The must-own date is the date that investors must own shares in order to receive the next dividend payment.

A Foreign Affair

Cramer's last piece of his diversified puzzle was owning a stock that has some foreign exposure. He said a U.S. company that does business overseas is no longer enough in our increasingly global world, investors must own a truly global company. The U.S. is often the caboose in the global economic love train, Cramer quipped, with China acting as the locomotive and Latin America, India and even Germany following close behind.

Investors needn't speculate on an exotic Chinese or Brazilian company in order to get their foreign exposure, however. Cramer said an investment a lot closer to home will suffice. He said Canada has one of the healthiest economies in the world and Mexico offers a fast-growing economy with low inflation as well. Baskets of European stocks are also a great way to play international markets.

To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.

-- Written by Scott Rutt in Washington, D.C.

To email Scott about this article, click here: Scott Rutt

Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC

Stock quotes in this article: GLD, GM, F, BAC, PIR, S, AAPL, CMG, PNRA, BBRY, NOK 
At the time of publication, Cramer's Action Alerts PLUS had a position in AAPL and F.

Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC Universal or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."

None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor TheStreet.com, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on TheStreet.com. The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in TheStreet.com, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.

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