Investors have taken to heart Jeremy Siegel’s studies, which show that top-yielding dividend stocks tend to offer greater returns over time than low- or no-yield stocks.  Money has poured into dividend generating stocks in recent years, partially as a result of the historically low interest rates that we continue to deal with.

The top-yielding dividend stocks can be very tantalizing.  As long as the dividend is sound, the yield essentially represents money in the bank.  And when you consider the long-term, annualized return of the Canadian and U.S. stock market is in the neighborhood of 8% (nominal), if you can lock in a yield of 6-8% or more, you’re well on your way to soundly beating the market.

An abnormally high yield however warrants caution.  Since dividend yields and stock prices move in opposite directions, a high yield usually means that investors have begun to worry about the business and driven down its stock price.  It’s important to keep in mind that all dividends are not created equally.  If it looks too good to be true, it probably is.

That being said, let’s have a look at the current roster of top 25 yielding stocks in the S&P/TSX Composite Index.

Source:  Capital IQ

At the top of the list sit poster child’s for our friendly reminder that not all dividends are created equally.  Both Chorus Aviation (TSX:CHR.B) and Just Energy (TSX:JE) have recently reduced their dividend, yet even with their lowered payout, they remain at the top of the list.

This could mean a couple of things.  One, the market doesn’t believe the cuts are done.  Or, the market is not reflecting the stability of this revised payout and has yet to bid the shares up, thus lowering the yield.

To get a sense for which of these items is closer to the truth, let’s turn to the cash flow statement for each.  Dividends are paid out of free cash, which is calculated by taking cash from operations and subtracting capital expenditures.

In the recent past both companies have gone from generating reliably significant free cash flow to consistently being in a negative free cash flow position.  In both cases, cap ex is significantly higher than it used to be.  Until this dynamic shifts, whether it be through reduced cap ex, or an improvement in cash from operations, expect the market to remain skeptical of both dividends by capping the price of the shares.

Which dividends do appear sustainable?

Sticking with our quick and dirty, free cash based analysis, according to Capital IQ, just 6 of the corporations in our list generated free cash over the last 12 months.  The 3 most significant generators, were Bell Aliant (TSX:BA), Canadian Oil Sands (TSX:COS), and Crescent Pt. Energy (TSX:CPG).  These three entities produced free cash of $514 million, $279 million, and $189 million respectively.

The Foolish Bottom Line

Dividends are a great way to generate market thumping returns and the cash flow statement offers a quick and easy way to determine whether or not a seemingly mouth-watering yield is sustainable.  Simply check out the company’s history of generating free cash.  If it’s sound, you know you’re onto something.

Another formula to follow for successful dividend investing is to diversify your holdings.  As investors seem to have to relearn every decade or so, you never want to put all of your eggs in one basket.  To help you diversify your dividend holdings, the Motley Fool has created a Special Free Report.  “13 High Yielding Stocks to Buy Today” will have you rolling in dividend cheques from a variety of sources before you know it.  To download this report at no charge, simply click here.

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A version of this post, authored by Dan Dzombak, originally appeared on Fool.com.

Fool contributor Iain Butler owns shares of Canadian Oil Sands.  The Motley Fool holds no positions in any of the stocks mentioned at this time.