Infographic

Anatomy of a yield trap

How a falling price inflates a dividend yield, and the warning signs (payout, earnings, debt) that separate a durable yield from a trap. Hypothetical numbers.

In one paragraphWhen a share price falls and the dividend has not changed yet, the yield rises on paper. If the fall reflects weaker earnings or rising debt, the dividend may be cut next, and the high yield was a trap.

A hypothetical company paying $2.50 a year

Before: $50 price5%

Price falls to $308.3%

Dividend cut in half4.2%

The yield jumped from 5.0% to 8.3% only because the price fell. After the cut, the yield on today's price is 4.2%, and the holder has lost 40% of capital and half the income.

Signs that separate a durable high yield from a trap
Usually reassuring	Usually a warning
Payout ratio steady and within the norm for the industry	Payout above 100% of earnings or free cash flow
Earnings and cash flow flat or rising	Earnings falling for several periods
Debt stable relative to cash flow	Debt rising to fund the dividend
Yield near its own long-run range	Yield far above its own history

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