Dividend Trap
A share whose high dividend yield reflects a falling price and an unsustainable payout rather than attractive income.
How it is identified
Test: the yield is elevated because the price fell, and the dividend exceeds free cash flow or is funded by borrowing
Unit
qualitative
In depth
Because yield is a ratio, a collapsing price mechanically produces an attractive-looking number — which is why screening for high yield surfaces companies in trouble more often than bargains. The diagnostic is whether the dividend is covered: compare it with free cash flow rather than reported profit, and check whether borrowings are rising to fund it. A payout ratio above 100%, or a dividend paid while operating cash flow is negative, is the clearest warning. When the cut comes, the investor loses both the income and further price value at once.
Worked example
A share falls from ₹400 to ₹150 while maintaining a ₹15 dividend, showing a 10% yield. Free cash flow is ₹8 a share, so the payout is being borrowed — and the cut removes both the income and the reason others held it.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Dividend Trap” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.