Dividend Traps
High dividend yields can sometimes be misleading, indicating potential financial trouble.
Unsustainable Yields
A very high dividend yield might suggest that the stock price has declined significantly, possibly due to underlying business problems. Investors chasing high yields without considering the sustainability of those dividends risk falling into dividend traps.
- Example: A company with a stock price that has dropped sharply due to poor earnings might still offer a high yield, but the dividend could be at risk of being cut.
Deceptive Attractiveness
High yields can attract investors seeking income, but these investments can be risky if the company’s fundamentals do not support the dividend. A cut in dividends can lead to significant capital losses.
- Example: Retail companies facing declining sales and profits may offer high yields, but if they cannot sustain their dividends, investors might face both income loss and capital depreciation.