It’s a hot investment trend that figures to get even hotter – and riskier. That’s the mushrooming demand for stocks with hefty dividend yields, the theory being the lofty yield will enable a stock to hold up if the market heads south. It may sound good in theory, but it’s downright dumb to latch on to a company solely on that basis, especially when the payout – and therefore, the stock – may be at risk.

Many investors, it’s felt, are foolishly racing after high yields without first assessing a company’s financial muscle and the safety of the dividend. So for many investors, fat payouts are nothing more than a trap for suckers.

In this context, Josh Peters, equities strategist at mutual fund industry tracker Morningstar, warns of this shortcoming as part of a look at what he regards as three risky companies with big payouts – Crescent Real Estate Equities, Equity Office Properties and TECO Energy, all Big Board stocks.

Mr. Peters cautions that all three – which currently offer respective juicy yields of 9.2%, 6.6% and 4.7%, versus a market average under 2% – flunk the most important test of the dividend: safety. Moreover, one Morningstar veteran thinks the three are vulnerable and should immediately be sold.

Running down the lurking dangers, Mr. Peters kicks off with Crescent Real Estate Equities, a real estate investment trust, which, he notes, is in poor financial health and less than three years after poor results forced a 30% dividend cut, may need to lower it yet again. Noting that the company has lost money on such ventures as a chain of psychiatric care hospitals and a telecommunications service provider, he fears that there’s no telling what management will do in the future. He also points out that Crescent’s payout ratio is more than 100%, a sign it can’t pay dividends from rental income. While its high yield is tempting, it’s built, Mr. Peters observes, on shaky foundation.

Next to Equity Office Properties, which, despite persistent shortfalls in operating cash flows, continues to maintain its dividend, funding the shortfall with proceeds from property sales and bank borrowings. This strategy, Mr. Peters believes, is not sustainable. Meanwhile, he adds, operating fundamentals will likely deteriorate further in the next few years as many high-priced leases signed during the tech bubble will expire and rents on new or renewal leases will probably be much lower. Compounding this threat, observes Mr. Peters, the firm may have to increase spending sharply to win and retain tenants in a weak market.

He acknowledges that the company should emerge stronger from a prolonged drought in the office market. But he cautions that the firm’s financial position may have reached a tipping point, and a dividend cut may be necessary to reflect the reality of weak operating prospects.

In the case of TECO, Mr. Peters said he’s skeptical about its ability to continue payouts at the current level. He notes that financial troubles forced the company to cut its dividend from $1.41 to $0.93 a share in 2003 and last year it was reduced again to $0.76.

TECO suffered badly after plunging into the wholesale power generation business just as the Enron meltdown and the California energy crisis led to a collapse in industry margins. As a result, it was stuck with a portfolio of costly gas fired plants that were uneconomical to run. This, in turn, forced its credit rating below investment grade, sharply increasing its financing costs. In 2003, TECO booked jarring asset impairment losses, with additional charges booked in 2004.

At present, the company has a number of positives, notes Mr. Peters. He cautions, however, that while restructuring efforts have helped, the company has to carefully husband its cash flow to pay down debt and a near-100% payout ratio on current earnings leaves little room for error.

The bottom line: Don’t chase risky yields! If they’re too fat, be wary.