Dividend investing is a fantastic way for individuals of all walks of life to reach financial independence. It is safe to say that at some point you’re going to want your portfolio to reward you with an income in the form of dividends. While dividends are a good way to “extract” cash from companies in your stock portfolio, not all stocks are suitable candidates for investing.
The dividend yield of a stock works both ways, it can increase if either the dividend payout increases or if the stock price decreases. When stock price decreases and dividend yield goes up, it could be an attractive opportunity to invest. However, if the stock price decrease is due to fundamental issues with the company underlying business, this could mean that we are buying into a dividend yield trap.
Here are 5 warning indicators to spot for dividend yield traps while hunting for the right dividend stocks.