Stocks that pay dividends can make a great addition to your portfolio. What they can't do, however, is give you a boost in income without adding any risk to your investments.

Feeling the income crunch
Unfortunately, an income boost is exactly what many investors are looking for right now. Across the financial markets, investors are seeing payouts on their investments drop dramatically. CD rates have fallen to the point at which it's difficult to earn more than 3% to 3.5% on your money, even if you're willing to tie it up for five years or more.

In response, some investors have moved their safe money to riskier investments in order to obtain higher yields. Yet even longer-term bond funds, which expose you to quite a bit of interest-rate risk, aren't paying huge yields right now. One long-term Treasury fund yields just 3.75% despite owning bonds with an average maturity of almost 20 years. Even the Vanguard High-Yield Corporate Fund (VWEHX), which owns bonds of issuers like Chesapeake Energy (NYSE:CHK), Mosaic (NYSE:MOS), and Sprint Nextel (NYSE:S), has seen its yield fall from double digits to less than 8% in recent months.

Why dividend stocks are attractive
Given the dearth of income most people are seeing from their portfolios, it's easy to understand why dividend-paying stocks are so tempting. Not only are their yields extremely attractive compared with other income-producing investments, but also the capital appreciation that many of those stocks have seen so far this year blows bonds and other investments out of the water. Just look at how well these dividend stocks have done:


Current Yield

2009 YTD Return

Altria Group (NYSE:MO)



Spectra Energy (NYSE:SE)



PPG Industries



DuPont (NYSE:DD)



Caterpillar (NYSE:CAT)



Sources: Yahoo! Finance, Google Finance. YTD = year to date.

Before you decide to move too much of your fixed-income money into dividend stocks, though, stop and consider the impact that move could have on your portfolio. For some insight, all you have to do is think back to what we've seen over the past two years.

The death of dividends
Back in 2007, few would have thought that stocks of banks and other financial institutions, many of which paid shareholders healthy dividends, would ever fall to their knees the way they did during the financial crisis. Yet fall they did -- and those who had forgotten that investing in stocks involves substantial risk got a quick, painful reminder of the consequences.

Along the way, many stocks that had paid solid, steadily growing dividends for decades were forced to cut their payouts, leaving shareholders who had depended on that income out in the cold. Even now, many of those former dividend-paying stocks are still languishing, paying a mere pittance compared to their former payouts. Despite the big rebound in the stock market, most of them still trade well below their levels from a couple of years ago.

If you had taken the money you'd need in the next few years back in 2007 and put it into dividend stocks, you might have suffered such huge losses that you would find it difficult to recover.

Be smart with your investments
Bear in mind that this cycle repeats itself every time we go through interest-rate fluctuations. As yields on CDs and Treasuries fall, there's always a temptation to ramp up your risk to grab higher returns elsewhere.

If you can truly afford to take more risk in your portfolio, then dividend stocks are a good way to diversify your investments. But if you're just looking for more income until rates recover, dividend-payers aren't the quick-fix solution you're hoping for. Playing dividend stocks for a short-term trade is just as likely to cost you a ton as it is to give you the extra income you sought.

Dividends are great, but this dividend-payer hasn't done so well. Read what Todd Wenning has to say about why you should avoid this investment.

Fool contributor Dan Caplinger knows there are plenty of good reasons to buy dividend stocks. He owns shares of Altria and Chesapeake Energy. Chesapeake Energy and Sprint Nextel are Motley Fool Inside Value recommendations. PPG Industries and Spectra Energy are Income Investor picks. The Fool owns shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy helps you invest for all the right reasons.