Yield Traps Vs. Income Kings: Harsh Reality Of High-Dividend Stocks

For income-focused investors, a 10% dividend yield can be very attractive, but such high yields often signal significant underlying risk.

• AGNC stock is moving. See the chart and price action here. 

The Dividend Trap

A yield becomes a “trap” when the high percentage is caused by a collapsing stock price rather than a growing business.

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• Payout Ratio: If a company pays out more than 100% of its earnings, it is cannibalizing its own capital to maintain the dividend, which eventually leads to a cut.
• The Price-Yield Inverse: Because yield is calculated as annual dividend / stock price, a stock that drops 50% due to poor earnings will see its yield double on paper. Investors who fall into this trap often experience a dividend cut and capital loss simultaneously.
• Debt Load: Companies in cyclical sectors (like energy) may use debt to fund dividends during downturns, which is unsustainable and increases bankruptcy risk.

The Benzinga Pro scanner feature was used to create a list of stocks with dividend yields above 10% (and market caps of at least $2 billion and floats above 5 million to filter out the noise). 

High-Yield Dividend Stocks

Company Name & Ticker	Dividend Yield %	Price
FS KKR Capital Corp. (NYSE:FSK)	17.39%	$14.72
Dynex Capital, Inc. (NYSE:DX)	14.77%	$13.81
AGNC Investment Corp. (NASDAQ:AGNC)	13.36%	$10.78
LyondellBasell Industries N.V. (NYSE:LYB)	12.72%	$43.08
TORM Plc (NASDAQ:TRMD)	12.47%	$19.89
Annaly Capital Management, Inc. (NYSE:NLY)	12.20%	$22.95
Blue Owl Capital Corp. (NYSE:OBDC)	11.65%	$12.70
Hafnia Limited (NYSE:HAFN)	10.96%	$5.37
Starwood Property Trust, Inc. (NYSE:STWD)	10.41%	$18.44
Western Union Co. (NYSE:WU)	10.12%	$9.29
Hercules Capital, Inc. (NYSE:HTGC)	10.03%	$18.75
Millrose Properties Inc. (NYSE:MRP)	10.02%	$29.94

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Successful dividend investing requires looking past the headline yield. 

The harsh reality of high-dividend stocks is that total return—the combination of price appreciation and dividends—is what actually builds wealth. 

Before investing in high-yielders like those in the table above, savvy investors should scrutinize the company’s free cash flow (FCF). 

If a company is not generating enough actual cash to cover its checks, the high yield is a red flag.

Tax Treatment: Dividends vs. Capital Gains

Many 10%+ yielding stocks (like REITs and BDCs) pay non-qualified dividends, meaning they are taxed at the highest marginal income tax rate. 

Qualified dividends from established blue-chips (like Altria or Verizon) enjoy the same preferential rates as long-term capital gains.

High-yield seekers should consider holding non-qualified stocks in tax-advantaged accounts, like an IRA, to avoid a heavy tax bill.

Taxation depends on whether the dividend is qualified or non-qualified.

Feature	Qualified Dividends	Non-Qualified (Ordinary)	Long-Term Cap Gains
Criteria	Held for >60 days; U.S. corporation	REITs, BDCs, short-term holdings	Assets held >1 year
Tax Rate	0%, 15%, or 20%	Ordinary Income (up to 37%)	0%, 15%, or 20%

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