Dividend Traps: How to Spot a Yield That's Too Good to Be True

If you've been dividend investing long enough, you've probably been burned by a yield trap. That 10%+ yield that turned into a 50% dividend cut and a cratering stock price.

Warning signs I've learned to watch:

1. Yield dramatically higher than historical average

If a stock normally yields 3% and suddenly yields 7%, the market is pricing in a cut. Don't assume you're smarter than everyone else.

2. Payout ratio over 100%

They're literally paying more in dividends than they earn. This is not sustainable. Check both earnings and free cash flow payout ratios.

3. Declining revenue and earnings

Dividends come from profits. Shrinking business = endangered dividend. Look at 3-5 year trends.

4. Heavy debt load with rising rates

Highly leveraged companies face pressure when borrowing costs increase. Interest payments compete with dividend payments.

5. One-time special circumstances

Sometimes yield spikes because of a special dividend or asset sale. Make sure you're looking at the regular dividend.

6. Sector in structural decline

Some industries are shrinking. The highest yields are often in dying businesses trying to attract investors.

Recent examples (without naming names):

• Telecom company yielding 8% → cut dividend 50% after subscriber losses

• Retail REIT at 12% yield → suspended dividend when tenants defaulted

• Energy MLP at 15% → slashed distribution when oil crashed

My rule: If yield is over 6-7%, I need to understand exactly why and be confident it's sustainable. Usually, I just pass.

What yield traps have caught you? We've all been there.