Cash and debt

Q

Is it best to invest in companies with lots of cash and no debt? — M.T., New Orleans

ANot necessarily. Lots of cash is generally good for a company, as it can (for example) permit it to invest in growth or pay dividends to shareholders. Companies with ample cash can take advantage of opportunities that come along. But having much more cash than can be put to good use is not optimal — so some companies aim to have low cash balances, planning to borrow funds when needed. (This strategy is less attractive when interest rates are high, though.)

Meanwhile, it's generally OK for a company to have a manageable amount of debt — especially at low interest rates. If it's borrowing at a relatively low rate while getting great results from the money, that's an effective strategy.

Q

What's a “highyield” stock?

— S.C., Elkhart, Indiana

AThere's no official definition, but it's generally one with a dividend yield topping (or significantly topping) some benchmark, such as the 10-year U.S. Treasury note — which recently yielded 3.7%.

A stock's dividend yield is the current annual dividend amount divided by the stock's current price. So if the Home Surgery Kits Co. (ticker: OUCHH) is trading at $100 per share while paying $1 per share in dividends each quarter (for a total of $4 per year), its dividend yield would be $4 divided by $100, resulting in 0.04, or 4%.

Don't invest in any high-yield stock without researching it first. As a stock price falls, its yield rises, and vice versa — so one ultrahigh yield might reflect a company in trouble, while another might reflect a healthy company with lots of cash to spare.