Tuesday, October 26, 2010

More Balance Sheet Issues to Consider.

This post is a continuation of your studies into the balance sheet of your stocks.

You are investing for both current and future income; right? So you selected companies that pay you dividends or bought a bond to pay you interest. As you watch the markets gyrate up, down, and sideways, you are concerned that, at this point in your life, you cannot afford to have your investments go belly up.

Your safest move is to make sure you invest in companies or lend your money to companies with a solid balance sheet. Companies with a solid balance sheet have the reserves to pay their dividends when times get tough and enough cash flow to cover their interest payments.

For instance: could diaper rash cause your investment to lose value? Yes. Look at the woes of Proctor & Gamble (PG.) Could Europe's troubles affect the value of your holdings in Coca Cola (KO?) Yes. Look at the slide of the Euro dollar and find that KO may suffer from that occurrence. 

Each of these companies is a hold because they have strong balance sheets and constantly increasing dividends.

I am not asking you to be an economist. The point of this post is; if you invest your money in a company that pays a good dividend and increases that dividend over time and has a cash reserve to get through tough times, your income is most likely safe even though the stock price moves up and down. Plus it is highly unlikely that your investment will go "belly up."

Your  job as a worried income investor and as a student of income investing is to determine the balance sheet strength of your investments by learning the D/E ratio of each of your investments.
Read my previous post on learning how to determine the debt to equity ratio (D/E ratio) of your investments.

Very Truly Yours,

TheMoneyMadam