HomeMarket NewsUnmasking the Siren Songs: Beware of These High Dividend Yield Traps

Unmasking the Siren Songs: Beware of These High Dividend Yield Traps

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High-dividend stocks may seem like a golden ticket for investors, offering attractive returns on investment. However, not all that shines is gold. Many stocks with lofty yields come with hidden risks, known as dividend yield traps.

Leggett & Platt (LEG)

It might be surprising to find Leggett & Platt (NYSE:LEG) on this list of potential yield traps. This furniture and bedding manufacturer, cherished by income-oriented investors, boasts a remarkable track record of growing dividends for 52 consecutive years. However, a closer look reveals a different story.

With Leggett & Platt shares plummeting approximately 45% in the past year, investors’ concerns are mounting. The company’s stagnant sales, shrinking profits, and declining margins are underlying causes for alarm. Intensifying competition forced the company to endure an 8% sales slump. Consequently, LEG’s EBIT margin turned negative, resulting in a loss per share of $1.00, the first GAAP loss since 1991.

Despite its dividend growth legacy, exercise caution before being lured by Leggett & Platt’s seemingly enticing 10.5% dividend yield.

Vodafone Group (VOD)

Vodafone Group (NYSE:VOD) presents another potential yield trap. The UK-based telecom giant has witnessed a decade-long decline in its shares, exacerbated in recent years by escalating debt in a rising rates environment eroding investor confidence.

While Vodafone reports a 20.4% improvement in debt reduction to €36.2 billion ($38.5 billion), the company’s huge net debt remains a looming threat to its future and high dividend yield. With a backdrop of tenuous financials, investing in VOD requires careful consideration.

Oxford Square Capital (OXSQ)

Oxford Square Capital (NYSE:OXSQ) emerges as another contender for the title of dividend yield trap. This business development company appears to offer an impressive 13.5% dividend yield, yet a deep dive reveals potential troubles lurking beneath.

Oxford Square’s debt-centric investment portfolio leans heavily towards low-quality assets likely to underperform. Only 30% of its holdings consist of first-lien secured debt, while an additional 31% is tied up in high-risk collateralized loan obligation (CLO) investments, known for their risky nature. With a history of dividend cuts due to failed investments impacting net asset value, the stock’s substantial yield mirrors market skepticism towards current payouts.

Investors should approach OXSQ with caution, weighing the associated risks against potential gains.

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