What is a dividend yield trap?
Dividend yield is the yearly dividend divided by the share price. When a price falls, the yield rises, even though the business is getting worse. A yield trap is a stock whose yield looks attractive only because the price has dropped on fears that the dividend will be cut.
Warning signs
- The yield is far above similar companies or its own history.
- The payout ratio is above 100% of earnings or free cash flow, so the dividend is not covered.
- Earnings or revenue have been falling for several quarters.
- Debt is rising while cash flow is shrinking.
- The dividend has not grown for years, or it was cut recently.
- The share price has dropped sharply over the past year.
How to check
Compare the dividend with earnings and cash flow, look at how the payout has changed over the past few years, and read the company's latest results. The stock page on Dividend101 shows yield, payment history and frequency so you can spot irregular patterns quickly.
A high yield is not always a trap
Some industries, such as real estate investment trusts and certain funds, are built to pay out most of their income, so higher yields are normal there. The point is to understand why the yield is high, not to avoid all high yields.
Frequently asked questions
What yield is too high?
There is no fixed number. A yield that is much higher than its peers or its own history deserves a closer look at whether the dividend is covered by earnings and cash flow.
Why does yield go up when the price falls?
Yield is the dividend divided by price. If the dividend stays the same and the price falls, the yield rises mechanically.
Keep reading
- Payout ratio and dividend safety
- How dividend yield works
- What happens when a company cuts its dividend?
General education only, not investment, tax or legal advice. Rules can differ by country and security.