Are investors better off investing in stocks with high dividend yields or rapidly growing dividends? It's an interesting question.

High dividend yields are rather compelling. National Grid, for example, was recently yielding 8%. Penn West Energy Trust (NYSE:PWE), meanwhile, has had a yield topping 13%. Just think about that -- you plunk $5,000 into a stock yielding 13%, and you can expect to receive $650 annually.

When the stock market has averaged annual returns of roughly 10% over long periods -- including some years with big losses, like 2008 -- it can be mighty attractive to find a company that aims to pay you close to that each year.

It's just not that simple, though. For one thing, companies do occasionally reduce or eliminate dividends. Just ask General Motors or Citigroup about that. And the companies with high yields are often (but not always) ones with stock prices that have plunged, suggesting they may already be in trouble.

Growth matters
So maybe you should just look for dividend growth? Well, there's a good case to be made for that. For one thing, a company that has regularly hiked its dividend for a long time is likely to continue doing so, or at least to try hard to keep its streak going. Such companies end up with a lot of respect -- and berths on lists such as the Dividend Achievers. Dividend increases are generally a sign of corporate health, and when you see a company that has been a solid dividend hiker suddenly slow its rate of dividend growth, or skip an increase ... or (gasp!) reduce or eliminate its dividend, that's a big red flag. It's not necessarily the end of the world, as many such companies regain their footing, but it's worth examining closely.

Dividend growth can be very powerful. A stock yielding 2% today might not look all that attractive, but if it raises its dividend by an annual average of 15%, it won't take long for that payout to look respectable compared to your original investment. You'd have collected $200 on a $10,000 investment the first year, but it would be more like $800 by year 10. See? The payout might not start out very high, but it can get there over time.

The best bottom line
So why not look for stocks that exhibit both a high yield and high dividend growth? It may not always be easy to find such beasts, but in this market, it's easier than usual. For example, when I screened for both, here are some companies I got:


CAPS rating (out of 5)

Recent Yield

5-Year Average Dividend Growth Rate













Home Depot (NYSE:HD)




Waste Management (NYSE:WMI)




Kraft (NYSE:KFT)




Caterpillar (NYSE:CAT)




Data: Yahoo! Finance, Motley Fool CAPS.

Here's a little warning, though -- never act just on data from a table like this. You don't have enough information, and you need to learn more about each contender's strengths and weaknesses.

Still, when you're looking for good dividend stocks, finding a combination of strong growth and high yield can give you some great prospects.

For more insights and investment ideas:

For some promising dividend-paying stocks, grab a free trial of our Motley Fool Income Investor newsletter, which will permit you to see all our recommendations, many of which offer yields north of 8%.

Longtime Fool contributor Selena Maranjian owns shares of Home Depot. Home Depot and Waste Management are Motley Fool Inside Value picks. National Grid and Waste Management are Motley Fool Income Investor recommendations. CNOOC is a Motley Fool Global Gains recommendation. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.