There's an old saying that too much of a good thing isn't good for you. That saying could apply to dividend yield.

Dividends and, therefore, dividend yields have come back in vogue with investors over the last year. That's not surprising. In an environment when capital gains are more difficult to achieve, dividend yield becomes more desirable. Think of dividend yield as the "bird in the hand;" it's nice to know that if a stock goes nowhere, at least you can make a little money off the dividend.

The problem with dividend yield, however, is that too much yield can be a bad thing. For example, let's say you are considering two electric utilities. One utility yields 5%; the other, 9%.

Which would you buy? Some people would say buy the higher yielding utility. After all, 9% is better than 5% right?

Not so fast. Remember - there is no such thing as a free lunch on Wall Street. A stock that is yielding well in excess of the average yield of stocks in its industry is probably a stock where Wall Street believes a dividend cut or omission is a very real possibility. The reason that electric utility is yielding 9% is because investors don't have a lot of faith that the dividend is secure. Those who buy the 9% yielder may end up getting no yield at all when the company eliminates the dividend.

With many income-oriented investments (certificates of deposit, money market accounts, bonds) providing very little yields at this time, many investors are turning to stocks to generate income. And some of these investors are stretching to buy stocks offering high yields. Bad move. Stretching for yield exposes you to a fair amount of risk. Better to buy a lower yielding stock with superior dividend-growth prospects than buy a high-yielding stock with zero (or worse) dividend-growth prospects.

Bottom line: Yield is a proxy for risk. When a yield seems too good to be true, it usually is. Keep that in mind next time you go yield shopping for stocks or any other investment.

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