It's not a good time for debt.

Ever since the last bear market, corporate debt rates have been relatively favorable, so it's been easy for companies to load up on low-interest, tax-deductible debt that also reduced their cost of capital. Debt, after all, is typically cheaper than issuing new equity.

The times, they will be a-changing, however, as the reality of higher inflation and a weakening dollar will eventually force the Federal Reserve to raise rates.

If that trend continues, companies with significant debt will face increased interest expenses, which will put increased pressure on their earnings growth.

Feeling the pinch
So, what does this mean for you? We're never fond of substantial debt, but this environment will be particularly difficult for companies with poor credit ratings that require higher yields to satisfy debt investors.

Therefore, you should use caution approaching companies with non-investment-grade bond ratings, especially if they fall into the "highly speculative" range. At current rates, companies such as CIENA (Nasdaq: CIEN), Ford (NYSE: F), and Rite Aid (NYSE: RAD) will have to entice investors with bonds ranging from 9% to 13% for 10-year debt. Those yields may go even higher.

If a company is paying all of its earnings into debt expenses, there's not much left for the shareholders.

Milk the cash cows
In every market, there are companies that can provide their own organic financing rather than take on debt. We call them cash cows.

Cash cows are companies that churn out gallons of free cash flow -- the cash that's left over after normal capital spending. There are good reasons to own stock in companies that generate strong free cash flow, and in a down market, those reasons become even more attractive.

When times are tough and interest rates are high, a company with free cash flow can use the excess cash to invest in itself, so that when the economy finally turns around, the company will be in a better position to take advantage of the good times.

Two stellar examples during the last bear market were Abercrombie & Fitch (NYSE: ANF) and Symantec (Nasdaq: SYMC). Both companies had positive free cash flows in 2000, carried healthy balance sheets, and were thus able to focus on building their core businesses. By the time the market recovered, they were able to reap the benefits -- since March 2003, these stocks have risen 177% and 63%, respectively.

Two current cash cows are Apple and Coach (NYSE: COH). Despite tremendous gains from both companies over the past five years, the stocks are well off their 52-week highs, but they nevertheless continue to generate gobs of free cash flow. Both are world-class brands, and the extra cash on hand will serve them well, no matter what the economy does next.

It does a portfolio good
It's always a good time to make sure that you're invested in financially sound companies with strong business models and reasonable valuations. But now is a great time. Even if we are headed for that predicted recession, you can sleep more easily knowing that you own a stable of quality stocks that are worth holding for the long term.

Need a few ideas to round out your portfolio? Fool co-founders David and Tom Gardner and their Motley Fool Stock Advisor investing service can help. Taken together, their Stock Advisor picks are beating the market by nearly 35 percentage points.

You can check out all of their recommendations, including their top five stocks for right now, with a free 30-day trial.

Fool contributor Todd Wenning wants you to promise him you'll never go bungee-jumping in Mexico. They just don't have the regulations in place down there. He does not own shares of any company mentioned. Apple and Coach are Motley Fool Stock Advisor recommendations. Symantec is a Motley Fool Inside Value pick. The Fool's disclosure policy was Jerry Springer's final thought on Friday's show.