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Beware these yield traps with dividend payouts that could be too good to be true

With the S & P 500 index down by about 20% so far this year, some investors are trying to ride out the storm. Facing war in Europe, stubborn inflation, rising interest rates and the threat of recession, they’re searching for beaten-up stocks offering fat present income. The danger, though, is that the hunt for what seems like attractive quarterly dividend payments today can set investors up for disappointment tomorrow. Just look at this screen CNBC Pro ran, using FactSet data to search for possible high-dividend traps. First, we looked at stocks in the S & P 1500 index (combining the large-cap 500, mid-cap 400 and small-cap 600), then narrowed our search to only those paying a dividend yield of 5% or more, with a debt-to-equity ratio greater than 100%, a dividend coverage ratio less than three and where analysts’ consensus estimates call for free cash flow to decline this year. The final filter we ran screened for stocks that have already fallen 20% or more so far in 2022. The result? A handful of stocks yielding between 5.9% and 9.4% in industries ranging from consumer cyclicals to energy to technology. Through Wednesday’s close, the best of them has tumbled about 29% this year while the worst is down almost 60%. Equitrans Midstream, a Pennsylvania-based natural gas pipeline operator, pays a dividend equal to a 9.4% yield, the highest in the group. Its debt-to-equity ratio was the second highest, at 308%. Equitrans stock has fallen 38% in 2022. Glatfelter, a North Carolina materials maker, pays a dividend equal to 7.8%, but its debt-to-equity ratio is 194% and the stock is off 58% through Wednesday’s close. Other stocks whose sky-high dividends appear at risk are clothing retailer Gap, photocopier manufacturer Xerox, restaurant chain Cracker Barrel and Hanesbrands, the maker of t-shirts and underwear.

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