Dividend Stock-Picking: Beware High Yields

This assignment was written by Stockpickr member Ira Krakow.

In a volatile market climate (such as the one we're in now), there is often a temptation to buy high-yielding dividend stocks. Buying a stock with a dividend that yields 6% or more is certainly preferable to sustaining a loss of 15% to 20% or more -- a situation that has been typical of even value-oriented stocks in 2008.

Some stocks that an investor lusting after high dividend yields might consider buying include:

Bank of America (BAC Quote) : 9.66% yield

Diana Shipping (DSX Quote): 8.08% yield

Pfizer (PFE Quote): 6.96% yield

Southern Copper (PCU Quote): 7.29% yield

Permian Basin Royalty Trust (PBT Quote): 9.64% yield

Consolidated Edison (ED Quote): 6.16% yield

(Source of dividend yields: Dividend.com)

But before you decide to buy one of these stocks (or any dividend stock), make sure you know the pitfalls, because there are things that can go wrong while you wait for those dividend checks.

Here's an extreme case: Last Friday, IndyMac Bank (IMB Quote) indicated a dividend of $1.00 per share. Based on its closing price of $0.28 per share, that would have represented a yield of 357%. Of course, over the weekend, the FDIC took over IndyMac. Had you bought IndyMac shares on Friday, you would have never received those one-dollar dividends.

How can you avoid such a catastrophe?