I always feel torn when encountering panhandlers. Part of me wants to help out. Part of me wants to ignore them. It is never a comfortable experience. I feel like if I give to one, I have to give to the next, and the next, and the next. Where does it end? There are often several congregated in an area. Every one of those individuals has their own unique story. There are certainly those out there playing the scam game as tonydead describes. There are certainly those with addiction issues that you don't want to enable. There those that have just encountered an unfortunate string of circumstances. How do you decide between them? As a general rule, I do not give to individual panhandlers out in the street. If I do give to someone on the street it is usually someone who is trying to DO something in exchange for the donation...washing windsheilds, playing music, selling trinkets, etc.
I much prefer to give and volunteer time at organizations that are better equipped than me to deal with people in these unfortunate circumstances. One local shelter that I have done some work with offers drug counseling, mental health services, basic job skills training in addition to tending to basic needs. One of their programs "employs" homeless to put together a periodic newspaper which they then sell on the street. They will give you one for nothing, but they ask for donations in exchange for the newspaper.