A dividend trap is a stock whose yield looks great precisely because the dividend is in trouble. The market is pricing in a cut you have not yet processed. There are five repeating patterns; if a name shows three or more, the high yield is almost certainly a warning, not an opportunity.

The Five Patterns

1
Yield > 2× peer median
Yield significantly higher than every comparable name in the same sector. The market knows something the headline yield doesn't. Sometimes it is wrong; usually it is not.
2
Payout ratio > 100%
Company is paying out more in dividends than it earns. Sometimes covered by cash reserves or asset sales; never sustainable for more than 1-2 years.
3
Debt growing faster than EPS
Net debt up year-over-year while earnings flat or down. The dividend is being maintained partly with borrowed money. Watch the credit rating; it usually follows.
4
Special dividend in lieu of regular hike
Management chooses to pay a one-time special instead of raising the regular dividend. Often signals doubt about future cash generation — they want to give cash back without committing to the higher base rate.
5
Sector in structural decline
Tobacco, traditional media, declining-output mature commodities. The yield can stay attractive for a decade — but terminal value is shrinking, and total return often disappoints even with the income.

Three or More = Probably a Trap

Any single pattern alone is suggestive but not conclusive — there are legitimate reasons each can show up temporarily. Three or more of these on the same name is the threshold where the base rate flips: most names hitting 3+ patterns end up cutting the dividend within 18 months.

The hardest part of avoiding traps is the asymmetry of the catch. The high yield is real money you receive every quarter while you are wrong; the eventual cut comes as a 30-50% one-day price drop and the loss of the income. The arithmetic favours the trap-spreader, not the trap-victim.

The Quick Sanity Check

  1. Compare yield to sector median. If > 2x, run the rest of the checklist.
  2. Pull payout ratio (EPS and FCF). Either above 100% = automatic flag.
  3. Look at 3-year debt trajectory. Up while EPS flat = flag.
  4. Check the dividend history. Recent specials replacing hikes = flag.
  5. Frame the sector story. Is volume in the underlying business growing, flat, or declining? Declining = flag.

5 patterns: 2× peer yield · >100% payout · debt up · special-instead-of-hike · structural decline
Three or more on the same name = base rate flips toward cut within 18 months
The asymmetry favours avoidance: small income gain vs large drawdown on the cut

Run the trap checklist on the dividend pool →