Investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price) as volatile stock markets continue to recover. Companies are responding by doing their best to maintain, or even increase, their dividend payments.

That’s good news for investors, because dividends are more dependable than capital gains as a source of income. In fact, dividends typically contribute up to a third of an investor’s long-term return. Tax cuts in recent years also mean that you pay roughly the same tax on dividend income and capital gains.

Look at the complete picture when buying high dividend stocks

Of course, high dividend yields are a big plus, but you should avoid buying stocks for this reason alone. That’s because the high dividend yield could be the result of a drop in the share price.

If the share price remains low, a high dividend could be an indication of much deeper problems. It may also mean that insiders are selling the stock due to bad news that is not yet widely known. In cases like this, it may be only a matter of time before the company cuts, or even halts, its dividend payments.

That’s why you have to look at a stock’s dividend yield in context with other factors, such as a company’s profitability and market position.

In the current issue of The Successful Investor, we update our buy/sell/hold advice on a company with strong fundamentals and a high dividend yield: insurance firm Great-West Lifeco Inc. (symbol GWO on Toronto). It’s one of the high dividend stocks we’ve covered for some time.

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Great-West: Much more than a high dividend yield

Great-West’s dividend yield is a high 4.83%, but that’s only the beginning. It’s Canada’s largest insurance company, with $340.7 billion of assets under management. It also sells retirement-planning and wealth-management services.

In August 2007, Great-West bought Putnam Investments Trust, a leading U.S. mutual-fund company, for $4.7 billion U.S.

Putnam increased Great-West’s stock-market exposure, which added risk, but it gives Great-West a number of big advantages. For one, Putnam has a large client base, and Great-West can now sell its insurance products to these customers. Moreover, Putnam is benefiting from rising stock markets. It has also launched new products that have slowed its fund redemptions. These include its “Absolute Return” mutual funds, which aim to deliver a specified return instead of beating an index.

Share sale helps shore up this high dividend stock’s balance sheet

Because of last year’s financial-market turmoil, Great-West had to set aside more cash to cover potential writedowns of the securities it holds. These include bonds issued by Royal Bank of Scotland and Lloyds Banking Group, both of which received assistance from the U.K. government.

However, Great-West sold $1 billion of common shares and $230 million of preferred shares late last year to shore up its already strong balance sheet. Moreover, the recession has driven down the value of many financial-services firms, so Great-West could use some of these proceeds to make acquisitions at bargain prices.

For a full update on Great-West and more high dividend stocks, be sure to consult the current issue of The Successful Investor. Click here to learn how you can get one month free when you subscribe today.