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Having a favicon for your domain name will not currently help your search engine rankings. But it does have indirect benefits that might, in the long run, benefit your site's rankings. This is the topic of a threat at SEW Forums named Is there any SE benefit to using a favicon.ico file?.
A favorite icon (favicon) is the small little graphic displayed to the left of the URL in the browser's URL bar. For Search Engine Watch it looks like 
for this site it looks like 
and for my corporate site it looks like 
. So how can this favicon help?
(1) Makes your site standout from the others (since many still do not have favicons). (2) The extra branding might help you get more links to your Web site, helping with search engine ranking. (3) On some browsers, that have "tabbed browsing" (Firefox, Ssafari, Netscape), it helps identify which tab has which site in it. (4)Keeps your error logs cleaner
Comments:
andrew
05/09/2005 03:10 pm
This is the silliest thing I have ever heard.
andrew
05/09/2005 03:12 pm
To clarify, the favicon helps with <strong>usability</strong>. It has no effect whatsoever on search engines or "SEO".
Barry Schwartz
05/09/2005 03:25 pm
Andrew, are you arguing or just adding your thoughts. I did say "Having a favicon for your domain name will not currently help your search engine rankings."
Sharikov
12/05/2006 06:54 pm
Hello! Good Design! http://furniture.awardspace.co.uk/
Michael
02/04/2009 12:43 pm
Whether or not favicon effects SEO shouldnt matter. For a web designer you should always have them. If it effects SEO, good, if not youve only taken 5 mins at the most to add the icon but its done alot for your professionalism
Dans
11/15/2010 09:37 pm
Am not sure if Favicon does help with SEO but Im pretty sure if you dont have it you pages will load faster.