Rising Dividend Yields: 3 Red Flags
Companies that increase their dividend yield—commonly calculated by dividing annual dividend payments by the current share price—are typically considered to be financially sound. But sometimes a rising yield can be a distress signal.
"If the yield rises and the share price is constant or rising, the company has increased its dividend payment—a good sign," says Adam Lynch, director of equity research at the Schwab Center for Financial Research. "However, if the yield rises and the dividend remains the same, the stock price had to have fallen—often not a good sign."
In evaluating whether a stock's dividend yield is problematic, look out for:
1. Yields above 4%
This threshold historically has marked the difference between sustainable and unsustainable yields. Indeed, research conducted by Schwab Equity Ratings® found that large-cap dividend payers with a median yield of 4.1% are nearly twice as likely to cut their dividend as those with median yields of 2.3% or less.
When more means less
Among U.S. large caps, companies with higher median dividend yields historically have had a greater likelihood of cutting their payouts.
| Yield decile | Median yield | Percentage of companies that increased dividends | Percentage of companies that decreased dividends |
|---|---|---|---|
| 1 | 0.4% | 49.6% | 4.5% |
| 2 | 0.9% | 70.6% | 4.2% |
| 3 | 1.3% | 73.8% | 4.3% |
| 4 | 1.6% | 73.2% | 5.3% |
| 5 | 1.9% | 75.7% | 5.5% |
| 6 | 2.3% | 75.4% | 5.1% |
| 7 | 2.8% | 73.9% | 5.6% |
| 8 | 3.3% | 69.4% | 7.8% |
| 9 | 4.2% | 60.6% | 10.8% |
| 10 | 6.3% | 42.6% | 24.0% |
Source:
Schwab Center for Financial Research, with data provided by LSEG Data & Analytics.
Data from 03/31/2004 through 03/31/2025. Table represents only dividend-paying stocks. Large-cap stocks are represented by the Russell 1000® Index.
2. Dividend coverage ratios below 1.5
This measure reveals the number of times a company can pay its current level of dividends out of its net income. Ideally, this figure is above 2 (or 200% of net income); dipping below 1.5 (or 150% of net income) suggests a dividend cut may be forthcoming.
3. Payout ratios above 80%
This metric tells you what percentage of a company's net income is paid to shareholders as dividends. When it creeps above 80%, the company may not have much left over to invest in growth or pay down debt—which could indicate a weakening financial position.
"The sector in which a company operates can also help you interpret if an increase in yield is cause for concern," Adam says. Financials and utilities, for example, are known as dependable dividend payers, so you might not be as worried by price volatility that pushes their yields up. Conversely, real estate investment trusts (REITs)—which represent a significant share of the real estate market—must pay out 90% of their income to shareholders. Thus, a significant increase often is the result of a falling share price, since most REITs don't have much room to grow their dividends organically.
"Regardless of sector, if you're holding a stock specifically for its dividends and the yield rises sharply, you might want to investigate the cause," Adam says.
To view a stock's dividend details, log in and click Stocks, then enter a ticker symbol in the search field.
- Once the page populates, scroll down to Dividends and click +Show More.
- Scroll down to view the stock's Annual Dividend Yield (under Dividend Rate) and its Payout Ratio and Dividend Coverage Ratio (under Statistics).
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Past performance is no guarantee of future results.
There are risks associated with investing in dividend paying stocks, including but not limited to the risk that stocks may reduce or stop paying dividends.
Schwab Equity Ratings are assigned to approximately 3,000 of the largest (by market capitalization) U.S. headquartered stocks using a scale of A, B, C, D and F. Schwab's outlook is that A-rated stocks, on average, will strongly outperform and F-rated stocks, on average, will strongly underperform the equities market over the next 12 months. Each of the approximately 3,000 stocks rated in the Schwab Equity Ratings universe is given a score that is derived from several research factors. The assignment of a final Schwab Equity Rating depends on how well a given stock scores on each of the factors and then how that stock stacks up against other stocks within the same sector and market cap group.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.