I usually try to read CNBC’s top stories every night before I go to bed. I’ve found that they are long enough to give you a ton of information of what’s going on in the financial world, but short enough to the point that you don’t get bored.

As you probably know, Jim Cramer has a show on CNBC called Mad Money, and often times the website summarizes his key points during the show.

A headline caught my eye last night - Cramer: Buy Eaton for Its Dividend. The title is one that was sure to catch anyone’s eye. With the stock market down 30% since last year at this time (and still falling), many people have transferred their holdings from the stock market to simple money market account and savings accounts that yield a higher return than the stock market.

For Five Reasons to Invest in Dividend Paying Stocks, click here.

To learn how to Make Money Doing Nothing: The Dividend Yield, click here.

To open up a free E*Trade savings account with 3.30% return, click here.

One stock Cramer suggests is the industrial company Eaton (NYSE: ETN). If you read the article and watch the video, Cramer makes some very good points. The CEO anticipated the downfall in the market, and prepared accordingly in order to assure that shareholders still receive a dividend. The yield jumped up to nearly 5%. Right now (2:25 pm, 10/23/2008), the yield is at 4.96%. Remember, as the stock price drops, the yield increases - the dividend yield is calculated as the dividend paid divided by the stock price. This can be misleading, though, because ETN will continue to pay $2/share, no matter what the stock rises to (or yield changes to).

Cramer says to buy this stock because of the high return. Yes, we agree.

Cramer then says,

“The thing to keep in mind is that you don’t want to buy this stock if it goes higher. Once Eaton gets to $50 a share, the yield drops to 4%, and that’s nothing compared to other dividends in the market right now. So consider buying Eaton as it goes down, Cramer said, but sell the stock if it goes up.”

On that, we disagree. Here’s why:

1) Cramer makes notes that ETN’s yield has risen 17% annually over the last five years. This is obviously a sign of a very healthy company. But if the stock price “rises” that much in the future and the company experiences healthier growth with the economy on the 4-5 year horizon (a mini economic-boom), they may continue to increase their dividend paid amount.

ETN built up cash reserves in anticipation of the economy. It’s a healthy company. It will probably be able to pay dividends after this mess is over. Giving up short term pennies for long-term cash is a terrible idea.

Remember, it’s only when a company cut’s dividend prices that you should be willing to sell soon. News of a company cutting dividends in and of itself will create the price to dip a few percentage points.

2) So say you do buy the stock for right around $30-$36 bucks with a 5-6% yield. That’s a nice return. Now say the stock price jumps to $50, and the yield falls to 4%. Giving up that 1% return on the yield is well worth a 66% jump in stock price. But Cramer’s argument is faulty. Once you purchase a stock at a set dividend yield, the return on the price of that stock is locked. For example, if you buy ETN at $30 bucks at a 5% yield, and the value of the stock rises, you’re still making 5% on that thirty dollars. On top of that, the value of your stock has risen.

The total return you receive on stocks is the yield plus the increase in value of the stock.

Further keep in mind, you are still getting paid $2/share! It’s not like the dividend paid goes down when the yield does.

As college students and new graduates, we should lock ourselves into a dividend yield and healthy stock for the long-run, not the short-run. You shouldn’t pass up on the increasing value of the stock for a minimal decrease in the return on a stock.

Although he does give good advice and makes very good points, we tend to disagree more than we should with someone who gives advice to millions. Not long ago, Cramer took heat for telling people to liquidate their stocks for cash now. On the surface, that makes sense, but people sacrifice a lot of money at the end of the road for a lower amount of money now than was originally invested. Not smart. What happens when you are ready to retire and the stock market is booming? You surely will regret selling off your stock.

Another time Cramer took heat for his remarks to Google. When Google (NYSE: GOOG) was high, he said buy. When it tanked, he said sell. He often times has been called a “contrary indicator” of stocks.

Cramer addresses the day trader - the people who take risks and think they can predict the market.

We address the investor - the person who wants to make a boatload of money.

Mad Money? Try Bad money.

For more articles on investing, click here.

No one at College Finance 101 is a direct owner of ETN shares.

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