The Trap of a High Dividend Yield

You see a stock with a dividend yield of 10%. The one next to it pays 3%. Instinct screams: "the bigger number wins" — after all, this is real money every year. But with dividends the high number is rarely a free lunch. Very often a yield of 10% or more is not generosity but an alarm — the market has already understood something you have not yet.

This article does not tell you which stock to buy. It shows you why one and the same number can mean "a strong company" or "a dividend about to be cut" — and how to tell the two apart.

A quick refresher: what yield actually is

The dividend yield is a simple ratio: the annual dividend divided by the share price, times 100.

Yield = annual dividend / share price × 100

If a €60 stock pays a €3 dividend a year, the yield is 3 / 60 = 5%. If this sounds new, start with how the dividend yield is calculated and come back here for the dark side of the number.

The trap: yield rises when the price falls

Look at the formula again. It has a numerator (the dividend) and a denominator (the price). The number can jump in two very different ways: because the dividend goes up — or because the price collapses.

Take the same stock: a €3 dividend at a €60 price is 5%. Now suppose the market panics and the price halves, to €30. The dividend has not been touched yet, so the math is 3 / 30 = 10%. Overnight the yield has doubled — without the company paying out a cent more.

Here is the trap: this 10% yield does not reflect generosity but a falling price. And prices rarely fall without a reason. Usually the market already expects the dividend to be cut or suspended — that is, the number luring you in is exactly the one the market does not believe. Put plainly: a high yield often means "the market does not believe this dividend will hold."

See it for yourself in the dividend yield calculator: the dividend is fixed at €3 and the price at €30, and the yield already shows 10%. Lower the price further and watch the percentage climb — precisely because the company is losing value, not because it is getting better.

The payout ratio: is it paying out more than it earns?

A dividend is sustainable only if the company actually earns the money it hands out. The measure of this is the payout ratio:

Payout ratio = dividend per share / earnings per share × 100

If a company earns €4 per share and hands out €2 of that as a dividend, the payout is 50% — half the profit goes to shareholders and the other half stays for growth and a buffer. Healthy.

Now imagine a company that earns €2 per share but pays out a €2.60 dividend. The payout is 130% — it gives more than it earns, covering the difference from reserves or debt. This cannot go on forever. A payout above 100% is an almost certain sign that the dividend is hanging by a thread and will sooner or later be cut.

Two examples side by side

Numbers gain meaning in comparison. Here are two made-up companies — one healthy, the other a trap:

Metric	Company A	Company B
Dividend yield	3%	12%
Payout ratio	50%	130%
Price trend	up	sharply down
What it suggests	a sustainable dividend	a likely cut

At first glance Company B looks four times more generous — 12% versus 3%. But look at the second row: it pays out 130% of its profit while its price falls. The high yield here is a symptom of illness, not of health. Company A, with a modest 3% but covered by a 50% payout and a rising price, is far more likely to be paying — and increasing — its dividend 10 years from now.

Your yield vs. the new buyer's

There is a second angle that confuses many: the yield you see today is not always the yield you receive. Two terms differ here.

Current yield uses today's price — this is the number on the screen, the same for every new buyer right now. Yield-on-cost uses the price at which you bought.

Example: you bought a stock at €40 when it paid a €2 dividend — you locked in 5%. Over the years the company raises the dividend to €4. Your yield-on-cost is now 4 / 40 = 10%, even though the price has jumped to €80, where a new buyer gets only 4 / 80 = 5%.

Notice the difference from the trap: here your high yield comes from a growing dividend on a low entry price — healthy. The trap is the opposite: a high current yield on a collapsed price. One is a reward for patience, the other a warning.

Don't forget the tax

And even the numbers that survive are taxed: in Bulgaria dividends are withheld at 5%, so your net yield is always a little below the gross — the details are in the tax on dividends.

What this does NOT mean

A high yield is not automatically bad — sometimes it is real; always check WHY it is high (a sustainable dividend or a falling price).
This is not a recommendation. Selurio is an educational platform — the goal is to understand the number, not to tell you what to buy.
The numbers are a guide. Past dividends do not guarantee future ones; companies cut dividends.

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