Great news for prospective buyers of American Home Mortgage (NYSE:AHM): After yesterday's plunge of nearly 90%, the stock offered an incredible dividend yield of 235%!

Back up the truck, right?

In fact, American Home Mortgage probably yields nothing. With business hurting and capital fleeing the company, AHM is unlikely to pay any cash dividend in the near future. The company's ability to remain as a going concern is also seriously in question.

But you wouldn't have known that by reading James Stewart's July 25 Wall Street Journal column. Defending an earlier stock pick gone wrong, Stewart wrote: "[O]n the face of it, the stock screams 'buy.' The dividend yield is 22%, and the P/E is 7.7."


I don't write this to pick on Stewart. Anyone who has the guts to pick stocks in public has had a pick go horribly, horribly wrong -- and I'm sure Stewart feels terrible. I'm sure because I know the feeling. Just take a look at what's happened to gay-and-lesbian media company gone cruise-ship operator PlanetOut (NASDAQ:LGBT) since I highlighted it as a worthy micro cap back at $6.70. (But let's never mention that again, OK?)

The dangers of data
Rather, AHM is the reason that investors should be very careful about using trailing data to justify investments going forward. When operating environments are changing rapidly -- as they are today for mortgage lenders -- investors need to toss the past out the window and start anew.

This is particularly true when it comes to researching real estate investment trusts (REITs) such as American Home. REITs, to be classified as such, must distribute at least 90% of taxable income to shareholders. That means they generally have high yields. Those dividends, however, are always at risk of either being cut or not being paid in cash.

Just look at Novastar Financial (NYSE:NFI). As this mortgage securitizer dropped, many investors were counting on some sort of hefty yield on the low stock price. It was a REIT, after all.

It didn't work out that way.

Thanks for nothing?
The good news is that Novastar shareholders look like they're still getting a dividend. The bad news is that the company's financing agreement with Wachovia (NYSE:WB) prohibits the company from paying cash dividends. It will be paying them in stock instead -- a stock whose value does not carry the certainty of cash. It might as well pay them in kittens.

So how can you decide whether home lenders such as Thornburg Mortgage (NYSE:TMA) and Countrywide Financial (NYSE:CFC) are values or value traps? It's going to involve pulling all of the company's filings and sorting through the loan portfolios one by one to reconstruct a valuation from the ground up. It's also going to involve trusting management -- something investors should be wary of doing after AHM told Stewart and other investors, point-blank, that they were not "being denied access to short-term lines of credit" -- and crossing your fingers.

Those are nearly impossible endeavors amid the current hysteria, and they're also reasons I'm sure that while some smart investor somewhere will time the bottom in these stocks, that investor will not be me.

Get out before you get in
Warren Buffett, the world's greatest investor, has famously admitted to having a "too hard" pile. One imagines that it's stacked with some great and other not-so-great ideas that the Oracle passed on because he wasn't 100% sure what he had in his hands.

In almost every other walk of life, I hate missing opportunities. Buffett's track record, however, teaches that in investing, it's absolutely crucial to pass on most "opportunities" if you want to succeed.

For dividend-paying stocks that won't let you down, take a free, 30-day peek at James Early's Motley Fool Income Investor newsletter service.

Tim Hanson does not own shares of any company mentioned. The first rule of the Fool's disclosure policy is that you talk about the Fool's disclosure policy.