Editor’s Note: In an era when political debates make middle school assemblies look like Mensa meetings, it’s no wonder investors are looking for something—anything—reliable.

Enter the dividend. Dependable. Predictable. Comforting, even. Like a warm cup of decaf in a world that runs on espresso and outrage. But don’t let that siren song of a 12% yield lull you into financial narcolepsy.

Sometimes, the louder the yield, the shakier the company. Below, I explain the profits and perils of big yield hunting.

Dividend Yield: Why Bigger Isn’t Always Better

There are really two kinds of stocks: those you hope will make you rich someday, and those that hand you cash now to ease the sting of not having made it yet. Technically, we call these growth and income stocks. Growth stocks are the hormone-fueled teenagers of the market—energetic, volatile, often unpredictable, but full of potential. Think tech companies with more R&D expenses than actual revenue.

Income stocks, by contrast, are more like semi-retired accountants: seasoned, steady, and handing out a little extra cash every quarter. These are your utilities, real estate investment trusts, pipeline operators—companies with stable cash flows and, often, not a lot of exciting new places to spend them.

Instead of building the next AI overlord, they give their profits to you. Sounds nice, right? Well, here’s the kicker: the dividend yield—which tells you how much income you’re getting compared to what you paid for the stock—can be dangerously misleading.

Let’s break that down. Dividend yield is simply the annual dividend divided by the stock price. If a company pays out $1 in dividends and its stock is $25, the yield is 4%. But if the stock price crashes to $10 while the dividend stays the same, the yield is now 10%.

Sounds amazing, right? Wrong. That 10% is a blood-red flag. It doesn’t mean the company suddenly became more generous. It means something went terribly wrong, investors bailed, and the price plummeted, perhaps because the dividend is about to vanish.

This is the dreaded yield trap. High yields often signal distress, not opportunity. And if you fall for the trap, you may end up with a stock whose value drops faster than the CEO’s bonus during a bankruptcy filing. Worse, when the dividend gets cut, and it often does in these cases, you’re left with a smaller payout and a dud stock.

The sad fact is, income-hungry investors often pile into high-yielding stocks without subjecting them to critical analysis. Investment publications and websites tout all sorts of intriguing high yielders, ranging from business development companies and mortgage finance firms to tanker owners and energy plays.

Sure, robust dividends are offered by well-known companies with solid balance sheets. But high dividends also can be used by new or inherently weak companies as bait for investors.

That’s why the savvy investor looks beyond the yield. A 2.5% dividend from a fortress-like business with reliable earnings is a far better long-term bet than a shaky firm dangling 10% like a worm on a rusty hook.

Because here’s another thing: growing dividends matter more than high dividends. Inflation isn’t a theory; it’s that extra $30 on your grocery bill. Fixed-income investments like bonds often lose to inflation over time. But dividends can grow. And if a company consistently raises its payout faster than inflation, your real income goes up. That’s the kind of financial sorcery worth chasing.

So, what should you actually look for?

• Earnings stability.
• Low payout ratio (they’re not bleeding themselves dry to pay you).
• Consistent dividend growth over several years.
• A defensible business model. (Monopolistic utility? Great. One-product biotech firm burning cash? Maybe not.)
• Reasonable debt levels.

Pay particularly close attention to the payout ratio, or how much of the company’s earnings are being paid out in dividends. That number is easily calculated by dividing the total dividends paid in any year by full-year earnings per share.

The result will give you a good idea of how far earnings can fall before the dividend would have to be cut. For instance, a company with a payout ratio of 60% could see its earnings fall by 40% before the dividend is in real danger.

What constitutes a healthy payout ratio depends on the industry, but on average, a good upper range is between 50% and 70%. A payout ratio much higher than that is an indication that the company isn’t investing in itself, thus stifling future growth potential as well as the prospect for an eventual increase in the payout.

The upshot? Pick quality. Choose companies that can pay you and want to keep doing so, without resorting to corporate acrobatics or creative accounting.

Yes, there are some high-yielding gems out there. But they’re rare, and they’re usually accompanied by high risk. Before you salivate over that 12% yield, ask yourself: Is this income…or a mirage? Because sometimes, the only thing worse than not getting paid is getting paid just before the company implodes.