I’ve written in the past that dividend investments can be a solid piece of your portfolio.  I prefer growth stocks, and in that realm, dividends are basically meaningless.  However, with more and more stocks, trusts, exchange-traded funds and the like, there are definitely intelligent ways to invest for yield.

Today, however, many investors are looking for certainty in an insanely volatile, uncertain world.  And because of that, many people are examining certain financial stocks or trusts that have an indicated dividend yield north of 10% … sometimes 20% or more!  Thus, all you have to do is buy and hold, and you’ll get paid a bunch of money … or so it seems.

As always, when you’re putting your money to work, you can’t leave your brain at the door.  Ask yourself: Why would XYZ company be willing to pay me 10% or 20% per year when everything else on the planet is yielding in the low single digits?  The answer: They’re not.  And in most cases, the companies aren’t even pretending they’re going to pay you that amount.  Let me explain.

When a stock’s “indicated yield” is cited, it’s simply a matter of taking the most recent dividend payment (say, $1 per share), and dividing it by the most recent stock price.  Now, three months ago, that stock might have been priced at 100 a share; with a $1 quarterly dividend, that meant a yield of 4%.

But today, after the market’s decline, that same stock might only be trading at 40.  Thus, since the last dividend was $1, the indicated yield is 10%, assuming the dividend will remain unchanged.

I’ve heard from a few dozen people who are going nuts over certain securities that are supposedly yielding 15% or more.  But the odds are very, very much against you getting any sort of payout like that.  If it’s a cyclical company, for example, which has been benefiting from rising commodity prices, it’s likely to slash its dividend in a big way during the coming months.  And, of course, any financial firm with liquidity issues is likely to chop its payout in order to preserve capital.

That’s not to say there aren’t some great dividend plays out there.  I’ve written about Verizon (VZ) in this Advisory before; I’m not pretending to have done exhaustive research on the company, but earnings are steady (actually rising 5% to 10%), and business isn’t going to fall off a cliff because of the economy.  Other stalwarts like Johnson & Johnson (JNJ, yield = 3.2%), Coca-Cola (KO, yield = 3.5%) and even Philip Morris International (PM, yield = 5.5%) are likely to keep their payouts roughly the same.

The message here is: Beware of the supposed free lunch on Wall Street, because there is no such thing.  Double-check the safety of the dividend before you jump in.