Yield trap

Yield trap — a stock (or fund) whose eye-popping yield exists because the price collapsed while the trailing dividend hasn’t yet been cut. The pattern: yield above ~8%, payout ratio above 100%, falling price. Since dividend yield = trailing dividend ÷ current price, a high yield is very often the market’s forecast that the dividend won’t survive — you buy the 12%, you receive the cut. The discriminator (payout ratio, dividend growth record, why-is-the-yield-high) is lesson 2.1’s core skill; the same logic extends to REITs (2.2) and engineered-yield products (2.4).

First used in: 2.1 · Dividends without the traps