Fundamental Data: Dividend/Yields

Not all stocks pay dividends, nor should they. If a company is growing quickly and can best benefit shareholders by reinvesting its earnings in the business, that's what it should do. Dell, for instance, doesn't pay a dividend. So a stock with no dividend or yield isn't necessarily a loser.

Still, many investors — particularly those nearing retirement — like a dividend, both for the income and the security it provides. If your company's stock price falters, you always have a dividend. And it is definitely a nice sweetener for a mature stock with steady, but unspectacular growth. Moreover, dividends are now taxed at a lower rate thanks to the investor-targeted tax cuts of 2003.

But don't make the mistake of merely searching for stocks with the highest yield — it can quickly get you in trouble. Consider the stock we mentioned above with the $2 dividend and the 4% yield. As it happens, 4% is well above the market average, which is usually below 2%. But that doesn't mean all is well with the stock. Consider what happens if the company misses an earnings projection and the price falls overnight from $50 a share to $40. That's a 20% drop in value, but it actually raises the yield to 5% ($2/$40). Would you want to invest in a stock that just missed earnings estimates because its yield is now higher? Probably not. Even when searching for stocks with strong dividends, it's always crucial to make sure the company clears all your other financial hurdles.