Why High-Yield Dividend Stocks Are a Hidden Danger in 2025

The allure of high dividend yields is seductive. In a low-interest-rate environment, investors desperate for income often overlook the risks buried in companies promising outsized payouts. But in 2025, a growing number of high-yield dividend stocks are flashing warning signs: unsustainable payout ratios, eroding earnings, negative free cash flow, and crippling debt. Chasing yield without scrutinizing fundamentals is a recipe for disaster. Let's dissect the red flags and why total return—not just dividend yield—should guide your decisions.

The Payout Ratio Trap: When Dividends Outrun Earnings

The first red flag is a payout ratio—the percentage of earnings paid out as dividends—exceeding 80%. Companies in this category are skirting the edge of sustainability. If earnings shrink, they'll either have to slash dividends or borrow to cover them, both of which destroy shareholder value.

Take B&G Foods (BGS), a company with a 95% payout ratio and a 7.7% dividend yield. Its net income has been collapsing, with Q1 2025 sales down 10.5% year-over-year. Even though it's cutting costs and selling underperforming brands, its payout ratio is so high that any further earnings decline could force a dividend cut.

Another example is Artisan Partners (APAM), with an 87.6% cash payout ratio. While its 2025 earnings stabilized, this level of payout leaves little room for error. If its asset management business faces fee compression or market volatility, maintaining dividends would require dipping into cash reserves—or worse, debt.

Declining Earnings: The Foundation Crumbles

High yields often mask deteriorating fundamentals. Polaris Inc. (PII), the recreational vehicle giant, offers a 7.7% yield but saw its 2024 EPS plummet 64% as revenue collapsed. Its Q4 2024 revenue dropped 23.6% year-over-year, and all business segments underperformed. Investors chasing its dividend ignored the warning signs: strategic cuts to underperforming products and a reliance on cost reductions rather than organic growth.

Meanwhile, Franklin Resources (BEN), with a 6.2% yield, saw its Q1 2025 net income drop 37% as the shift to low-cost ETFs eroded its traditional mutual fund business. Its payout ratio, while manageable at 51%, is now threatened by declining earnings.

Negative Free Cash Flow: A Silent Killer

Dividends are paid from cash flow, not earnings. Companies burning through cash to fund payouts are ticking time bombs. Altria Group (MO), with a 6.8% yield, faces headwinds from declining U.S. smoking rates. While its payout ratio is 77%, its reliance on high-risk ventures like cannabis and e-cigarettes to offset revenue declines is precarious.

Even Enterprise Products Partners (EPD), a midstream energy MLP with a 7% yield, is exposed. MLPs often have high payout ratios due to their structure, and EPD's leverage to oil/gas prices means its cash flow is volatile. If energy prices slump, its ability to sustain dividends—and its debt-heavy balance sheet—could come under pressure.

Debt: The Final Straw

High debt exacerbates all the above risks. B&G Foods carries $2.06 billion in debt (8.4x EBITDA), with an Altman Z-Score of 1.48—signaling a high bankruptcy risk. Its dividend, while “sustainable” on paper, is irrelevant if it can't service its debt.

Two Harbors Investment (TWO), a REIT with a 15.32% yield, uses debt to fund dividends—a common tactic in the sector. But as interest rates rise, refinancing that debt becomes costlier, squeezing cash flow and forcing dividend cuts.

The Bottom Line: Focus on Total Return, Not Just Yield

Investors chasing high yields often ignore the math: a stock with a 10% dividend yield that drops 30% in price leaves you with a negative total return. Instead, prioritize companies with:
- Payout ratios below 60%.
- Steady or growing earnings.
- Positive free cash flow.
- Debt levels manageable relative to earnings.

Final Warning: Dividend Cuts Are Coming

The writing is on the wall. Companies with unsustainable payout ratios, eroding earnings, and debt burdens will face pressure to cut dividends in 2025. When they do, their stocks will plummet. Avoid the trap: dig into fundamentals before buying any high-yield stock.

The market's next wave of volatility will test these companies. Investors who prioritize dividend sustainability over yield will be the ones standing when the music stops.

This article is for informational purposes only and not financial advice. Always consult a professional before making investment decisions.