Investing Insights

Is Your Dividend Income at Risk? Here’s How to Spot Dividend Traps

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Sep 26, 2025
Dan Lefkovitz, a Morningstar Indexes strategist, shares insights on avoiding dividend traps, defining them as risky payouts tied to company fundamentals. He explores how Dow Chemical's unsustainable dividend led to a significant cut and highlights warning signs from other brands like Shell and Walgreens. Dan Kemp, Chief Research and Investment Officer, discusses the lagging performance of healthcare and consumer defensive sectors, attributing it to political challenges and high valuations. Both emphasize the importance of understanding portfolio fundamentals.
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INSIGHT

What A Dividend Trap Is

  • A dividend trap is a stock that lures investors with a fat payout that proves unsustainable.
  • When dividends are cut it usually coincides with a falling share price and lost investor income.
ANECDOTE

Dow's Dividend Warning Signs

  • Dow Chemical's dividend exceeded its free cash flow and its yield topped 10% before the cut.
  • Tariff announcements then forced Dow to halve its dividend, illustrating the risk.
ANECDOTE

Big Brands Still Cut Dividends

  • Shell, Walgreens, and Intel all cut dividends after facing specific business stresses like oil price collapse and reimbursement pressures.
  • Long dividend histories did not prevent those cuts when fundamentals broke.
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