Financial Term Explorer
High Yield Trap
Abnormally high yields often signal imminent dividend cuts or stock price crashes. Careful analysis required.
📝 Definition
**High Yield Trap** describes dangerously high dividend yields that result from stock price crashes rather than genuine income potential. These often precede dividend cuts.
In Simple Terms
15% yield? Stock crashed, making yield look high. Dividend cut is probably coming soon.
Example
GE's yield exceeded 10% in 2019, but dividends were later slashed to nearly zero.
💡 Practical Tips
- 1Yields 2x+ industry average warrant suspicion.
- 2Payout ratio over 100% is a red flag.
⚠️ Common Mistakes
Sorting screeners by highest yield puts trap stocks at the top. Always do additional research.
❓ Frequently Asked Questions
How to identify safe high-yield stocks?▼
Payout ratio under 60%, healthy debt levels, stable cash flow.