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Interest Rates,Dividend Yields, And Profits

As I begin my journey into managing my own money I will really focus in on 3 metrics which are key to Me. They are interest rates, dividend yields, and profits.

Interest rates are key because they determine your cost to borrow for things like a mortgage, car loan, or any other consumer debt. It is also the return expected to sit on cash at the bank. Ideally any investment I make needs to clear both hurdles. Anyone with money in the bank knows the lower hurdle is beating bank rates or US government rates. Consumer debt is even cheap but I want investments that will reward me over simply paying down my mortgage. As a proxy for interest rates I will use the US Government 10 yr note as I am taking a longer term view on my investments.

Dividend payments are the most tangible reward of being a partial owner in a company. As an investor I see myself as an owner, not just trading pieces of paper with random values assigned. As an owner I want part of the profit coming to me, and I want that cash stream to grow. Preferably at a rate that will exceed inflation. My view on dividends will be how many dollars do I have to pay today for $1 of dividend cash flow. Of course there are chapters in finance books dedicated to the Future Value and Net Present Value, but I really will not bust out my old text books to perform this type of calculation.

Profits I view in the same light as dividends. We want to own a profitable company. However, accounting tricks have made EPS only a marginally valuable metric. Instead I will focus on EBITDA. I will look at EBITDA as I do dividends, how many dollars do I have to pay today for $1 of EBITDA.

The fourth variable to consider is inflation. Guessing inflation is really like trying to catch smoke. In general we have seen 2 decades of benign inflation thanks to Alan Greenspan. The current Fed policies of easy money could, at some point, trigger inflationary pressures. However, I do not have the time to play an Economist so I will simply use 2.5% as my inflation gage when look at my investments, particularly interest rates and dividend growth.

Feel free to follow me on Twitter @TxMichaelDugan

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.