If you're at least as stock-savvy as I am, you probably know these three things about dividends:

However, we don't always consider these facts as a whole. We may get excited by a stock with a steep dividend yield, but fail to investigate its history of increasing that dividend. That oversight could be a mistake.

If you're looking at two companies -- one with a 2% yield, and one with a 4% yield -- the former company might increase its dividend regularly and considerably, while the latter company might rarely raise it at all -- or eliminate it. Last year, many companies, including General Electric (NYSE:GE), Dow Chemical (NYSE:DOW), and Pfizer (NYSE:PFE), slashed their dividends significantly.

We should also remember that yields often fluctuate. In these days of considerable market turbulence, with many companies watching their stock prices fall sharply, dividend yields are spiking all over the place. Those increases make now a particularly promising time to for dividend investors.

Hello, dividend heaven
Imagine that Scruffy's Chicken Shack (Ticker: BUKBUK) pays a $2 annual dividend ($0.50 per quarter) and sports a stock price of $60. That makes its dividend yield 3.33%, or $2 divided by $60. Assuming the dividend holds steady, look how the yield changes as the price falls:

Stock Price
















It's true that if you buy 100 shares at any of these prices, you'll receive no more or less than $200 in dividends yearly from Scruffy's. But that income will cost you a lot less when you buy your shares at $40 instead of $60. Thus, your yield -- the income you receive relative to the price you paid -- will be higher. 

Focusing on growth
Companies with consistently growing dividends can be promising investments, since your dividend yield can keep rising even if the share price doesn't.

Here are a few companies with strong dividend yields and healthy dividend growth rates:


Recent Dividend Yield

5-Year Dividend Growth Rate

Johnson & Johnson (NYSE:JNJ)



Novartis (NYSE:NVS)



ConocoPhillips (NYSE:COP)



McDonald's (NYSE:MCD)



Source: DividendInvestor.com.

Don't stop at dividends
There's even more to consider if you want to make the most of your investments. When evaluating investment candidates, look at each company's financial health and competitive position. Dividends aside, does its future excite you? Is its stock fairly or attractively priced?

If you can find companies that look like terrific investments even without their significant dividends, you may be set to profit from a powerful one-two punch: capital appreciation and dividend income.

As you scour the stock universe in search of companies that could make you comfy in your old age, look at all aspects of their dividends. Aim to take advantage of rising yields when stock prices fall, but consider the overall health and promise of the companies, too. That's the best way to avoid yield traps and invest in strong companies.

We'd love to help you find some dividend winners. Take advantage of a free trial of our Motley Fool Income Investor newsletter service and you'll be able to access all past issues and read up on every recommendation in detail.

This article was originally published on Jan. 25, 2008. It has been updated by Dan Caplinger, who owns shares of General Electric. Pfizer is a Motley Fool Inside Value pick. Novartis AG is a Motley Fool Global Gains recommendation. Johnson & Johnson is a Motley Fool Income Investor pick. The Motley Fool is Fools writing for Fools.