3 Tips to Help You Dodge Dividend Yield Traps | Personal Finance

A payout ratio above 100% can mean that the company is taking on debt to pay its shareholders, which is not good. Sometimes, though, high payout ratios are due to cash flow being higher than net income because of non-cash items that reduce net income on an accounting basis. But if a company is paying out more than it’s bringing in, it will be hard for it to maintain its dividend over the long term, and the company could be in financial trouble (or headed there).

Dividends can be a great thing

Dividends are a great way to earn money from your investments, and if reinvested back into more shares of the company or funds, they can be a boost on the way to accomplishing your financial goals.

But everything that glitters isn’t gold; make sure the companies you’re investing in are sound in other aspects of their business and not just because they’re offering a “lucrative” dividend payout. Dividends should be a bonus when you invest in a company, not the sole reason you do it.

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