One of the SEO arguments out there is the detrimental effect of outbound links on “link juice” and PageRank dilution. While not completely inaccurate this is somewhat of a myth that requires further explaination.
Outbound links are links pointing from your website to external sites. Over time, as your website becomes more popular (more and more sites linking to it) this popularity embodies itself in a term we call “Link Juice”. How you distribute that juice within your site is crucial to the overall success of your ranking efforts.
Logic says, if you’ve worked hard to increase your link popularity (Link Juice) then why would you want to distribute your hard earned work to other sites for free? The answer…You don’t unless…the sites you’re linking to are authoritative ones that add value to your user’s search needs.
One solution to stop leakage of link juice to external sites is to add the “nofollow” attribute to your outbound link, however here is why I don’t recommend doing so for external sites relevant to your niche.
1) By adding nofollow to a relevant external link, you’re telling search engines that the page you’re referencing is not important and therefore do not follow it, this is in complete contradiction to what you should be telling search engines, and that is, I’m an authority on my niche and the links to external sites I reference on my site are important enough for me to link to and pass on my popularity.
2) Google’s algorythm (based around the concept of “PageRank”) was concieved around the idea that sites with more authoritative links pointing to them recieve more “PageRank” so by adding “nofollow” to authoritative sites related to your niche, you’re actually tampering with Google’s formula of ranking sites according to popularity and authority, do you really want to tamper?
3) If your site gets known for using nofollows on all it’s links, other sites will be less likely to link back to you. No one wants that, unless you’re the Wikipedia ;-)
Examples of links you should “nofollow”:
a link to the analytics company embedded within your code and shows up across the entire site.
a link found in the footer of your site that shows up across the whole site (such as a link to a sister site)
an internal link to your t&c’s page or similar pages found in the footer and linked to from every page on your site.
To sum up, and in a nutshell.. using the “nofollow” attribute on outbound links should be exercised with caution, and the basic rule of thumb, only nofollow links that are irrelevant to your niche.