Investing term
What is Dividend trap?
A stock that lures investors with a high yield it can't sustain — and then cuts it.
A dividend trap is a stock that lures investors with a high yield it can't actually sustain — and then cuts the dividend, leaving them with both lower income and a falling price. The trap works because yield rises as a price falls, so a struggling company's shrinking share price can produce an eye-catching yield that looks like a bargain.
The reality is that an unusually high yield is often the market's warning that a cut is coming, not a gift. When the dividend is finally cut, the support the yield was providing vanishes, and the price can drop further. The lesson is to chase the business, not the yield: a sustainable, growing dividend from a healthy company beats a high one from a company whose earnings can't cover it. Checking the payout ratio and the health of the underlying business is what tells the two apart.
A falling price pushes the yield up to a tempting level, luring investors — then the unsustainable dividend is cut and the price falls further. Chase the business, not the yield.
For example
A struggling company sports a tempting 9% yield; the yield is high only because the price has crashed, and months later the dividend is cut, hurting holders twice.
Learn it by doing
That's Dividend trap in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 8, Corporate Actions: What Lands in Your Account).
Try the free lesson →Why it matters to you
Dividend traps matter because they exploit a natural but dangerous instinct — reaching for the highest yield — and punish it with a double loss of income and capital. Understanding that yield rises when price falls reframes an unusually high yield as a possible red flag rather than an opportunity. It pushes income investors to judge a dividend by whether the business can sustain it, not by how big the number looks, which is the single best defence against the trap.
⚠ Chasing the highest yield on the screen
Sorting stocks by yield and buying the top of the list is a classic way into a dividend trap. The highest yields often belong to companies whose prices have collapsed for good reason, with dividends that can't be sustained. A high yield is a question to investigate — can the business afford it? — not an answer. Chase the business, not the yield.