Buying on dividend yield, good or bad?

Sometimes we select stock base on dividend yield. We might say this business looks to be able to generate good and stable cash flow over previous years. Even the growth is not high, but it is slow and steady, at least without severe drop as it seems historically. Due to that, in low interest rate environment, we might think that 6, 7 % dividend yield return is a very attractive rate. In other cases, we might find other small company that can provide dividend yield up to 8% to 10%. Again look at the historical track record, it seems quite stable.

But is it really safe? Unexpected can happen. Even the strongest business can drop in challenging economy time. Earning can turn and cash flow reduce. Even if the company is still strong and stable, the drop in cash flow will prompt the management to reduce the dividend payment, hence drop in dividend yield. Bear in mind that challenging economy comes in cycle, some very long that we can't recall the history if we are not aware of it. When it come, it can stay long too. We are not just suffering from drop in dividend yield return, but also drop in share price. Many times, the drop can be severe and takes a long time to recover. Even more so apply to small company. Small company is vulnerable to strong economy headwind. When the headwind is strong enough, it is common for those small companies that once afford to pay dividend into losses. If the challenging economy last for long, it can bankrupt the companies.

Hence, i feel buying into dividend is not very good. We need to buy into business/company that has visibility future growth prospect that offer undervalue price, or buy into stable business that offer substantial undervalue price. If really want to buy into dividend yield, buy those strong and stable business that can afford to pay over 10% dividend yield, because most of the time, it is undervalue. Only undervalue stock provide margin of safety cushion, not dividend yield.