For many years people working in SEO have struggled to understand how the no-follow tag for links was viewed by Google, most people understand that it does stop the flow of Pagerank to other sites but many have assumed that therefore it keeps back Pagerank and helps more flow to other pages, including pages on the same site and other partner sites and sister sites.
Matt Cutts of Google though has categorically stated that Google doesn’t pass extra Pagerank to a page because another link is no-follow: the Pagerank is still worked out based on how many links regardless of how many, if any, are no-follow.
This has now been the case for some years but many still need to update their sites; many site owners have tried to direct Pagerank to certain pages on their site, or sculpt Pagerank in such a way that a site generates Pagerank internally: this is not possible, certainly not through using no-follow links and still not through loops within a site. Matt Cutts has also confirmed that Google uses a decay factor on Pagerank as it is passed, chances are there are also other algorithms to stop sites being able to generate Pagerank internally, or else everyone would do it.
Google want no-follow to only be used for its original purpose, to say ‘I don’t endorse this site’, they therefore don’t want people using this on their own pages or on all external links. So how should no-follow links be used? From an SEO point of view you need to consider who you link to with a do-follow, if you link to too many spam and poor quality sites you will get penalized by Google and they will start ignoring all of your links, including internal links. On the other hand linking to the right sites can actually boost your sites, Google see linking to other high quality, high Pagerank sites with do-follow links as a sign that you may have a good quality site as well.
It is worth considering this then for SEO purposes especially if your site has a lot of user generated content, many blog owners and other site owners have all links in comments set to no-follow; if you have time to check your comments though before they are published you may be better to manually edit them and either don’t publish content including poor quality links or make them no-follow manually.
Should you then make an effort to include as many do-follow links to high pagerank sites as possible for SEO? Well to an extent, of course high quality content on your own site is still most important for SEO but putting in do-follow links to relevant useful sites when possible may be a good idea.
All internal links should be do-follow as well, there is no advantage to be gained by making them no follow and does it really make any kind of sense to be saying to Google of any of your own pages ‘I don’t endorse this page’?