The Hidden Dangers of High-Yield Dividend Stocks: Why STRR and Others Are at Risk of a Dividend Cut

Folks, let’s talk about the siren song of high-yield dividend stocks. They promise a steady stream of income, but what happens when that stream turns out to be a mirage? Take Starwood Property Trust (STWD), a mortgage REIT with a 9.47% yield that’s luring income-hungry investors. On the surface, it looks like a goldmine. But dig into the numbers—and you’ll find a ticking time bomb.

The Payout Ratio: A Canary in the Coal Mine

The first red flag? A dividend payout ratio of 173.38% [2]. That means Starwood is paying out more in dividends than it earns. For context, a sustainable payout ratio for REITs typically hovers around 80–90%. When it exceeds 100%, it’s a warning sign that the company is relying on debt, asset sales, or retained earnings to fund its payouts.

Data from Q2 2025 shows Starwood’s GAAP net income at $129.8 million, while its distributable earnings (a non-GAAP metric often used by REITs) hit $151.1 million [1]. Yet, its quarterly dividend of $0.48 per share translates to an annual payout of $1.92, which far outpaces its earnings. Even if we stretch the math using distributable earnings, the payout ratio remains unsustainably high.

Cash Flow and Balance Sheet: The Unseen Strain

Starwood’s balance sheet tells a similar story. Total assets sit at $62.37 billion, but liabilities are a staggering $55.20 billion [5]. That’s a debt-to-asset ratio of 88.5%, meaning most of its operations are funded by debt. High leverage is a double-edged sword—when interest rates rise or asset values dip, the pressure on cash flow intensifies.

In Q2 2025, Starwood deployed $3.2 billion in capital and acquired a $2.2 billion net lease platform, Fundamental Income Properties [1]. While this expansion might seem bold, it was financed partly by issuing 25.5 million shares of common stock. Share dilution can erode shareholder value over time, and it’s a tactic often used by companies to mask weak fundamentals.

The CEO’s Guarantee vs. the Numbers

Barry Sternlicht, Starwood’s CEO, has touted the company as the only mortgage REIT to never cut its dividend [4]. That’s impressive, sure—but history doesn’t guarantee the future. The company’s dividend coverage ratio (distributable earnings divided by dividends) has fallen below 1.0X [3], meaning it’s technically paying more in dividends than it generates. This is a classic red flag for dividend cuts.

Why This Matters for Investors

High-yield stocks like Starwood are often marketed as “safe” income plays. But when payout ratios exceed 100%, the math doesn’t add up. Investors must ask: Is the company reinvesting in growth, or is it just recycling cash to meet dividend obligations?

For Starwood, the answer leans heavily on the latter. Its focus on maintaining the $0.48-per-share payout—despite deteriorating cash flow metrics—suggests a prioritization of short-term yields over long-term stability. This is the definition of a “false dividend” stock: one that appears secure but is structurally vulnerable.

How to Spot the Hidden Dangers

1. Payout Ratio > 100%: Immediate red flag.
2. Rising Debt Levels: High leverage amplifies risk during downturns.
3. Dilution as a Funding Source: A sign of financial stress.
4. Declining Coverage Ratios: Indicates unsustainable payout trajectories.

Starwood’s case isn’t unique. Many high-yield REITs and utilities face similar challenges. The key is to look beyond the yield and scrutinize the underlying cash flow and balance sheet health.

Final Takeaway

Starwood Property Trust’s 9.47% yield is tempting, but it’s built on a house of cards. The company’s financials suggest a dividend that’s more promise than guarantee. For investors, the lesson is clear: Don’t let the allure of high yields blind you to the risks. Always check the math—and be ready to cut your losses before the music stops.

Source:
[1] Starwood Property Trust Reports Results for Quarter Ended June 30, 2025 [https://www.prnewswire.com/news-releases/starwood-property-trust-reports-results-for-quarter-ended-june-30-2025-302524056.html]
[2] Starwood Property Trust, Inc. (STWD) Dividend Date & ... [https://www.koyfin.com/company/stwd/dividends/]
[3] Starwood Property: Is The Dividend Safe? [https://seekingalpha.com/article/4788059-starwood-property-is-the-dividend-safe]
[4] Earnings call transcript: Starwood Property beats Q2 2025 ... [https://www.investing.com/news/transcripts/earnings-call-transcript-starwood-property-beats-q2-2025-earnings-forecast-93CH-4178096]
[5] Starwood Property Trust, Inc. (STWD) Stock Financials [https://seekingalpha.com/symbol/STWD/balance-sheet]