How Income Investors Can Avoid Dividend Traps in 2026

Equity income is hard to come by these days. The Morningstar US Market Index‘s dividend yield in the first quarter of 2026 is below 1.2%—extremely low by historical standards. While yields are higher outside the US, the Morningstar Global Markets ex-US Index’s 2.6% dividend yield is also pretty paltry.

		Dividend Yields Are Low by Historical Standards—in the US and Internationally
	



		Trailing 12-Month Dividend Yield (%)

Source: Morningstar Indexes. Data as of Jan. 30, 2026. Download CSV.

There are several reasons for this. Stock prices have appreciated significantly over the past few years, and dividend payments haven’t kept up. Especially in the US, share repurchases have outpaced cash payouts to shareholders. Companies are now deploying cash for artificial intelligence buildouts. Lately, a revival in the performance of dividend-rich sectors like industrials, energy, and consumer defensives has been good from a total return perspective but has depressed yields. Outside the US, dividend-payers have outperformed the broad market for years.

In a low-yielding environment, equity investors can be tempted to target stocks with fat payouts. But that can get risky. The market’s juiciest yields can be found in troubled sectors, industries, and companies. One way for a company’s yield to rise is for its share price to fall, which often happens due to fundamental reasons.

Therefore, equity-income investing is done best in a risk-aware way, with dividend durability as a key consideration. Morningstar Indexes screens dividend-payers on several metrics for its benchmark range. Below, my colleague Saumya Gattani and I will examine the predictive power of three screens employed in dividend-focused benchmarks. But first, a warning against overreliance on dividend history.

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As With Everything in Investing, Past Dividends Aren’t Predictive

Consider some of the well-known multinationals that have cut their dividends in recent years: Whirlpool WHR, Saudi Aramco 2222, 3M MMM, Dow DOW, Walgreens Boots Alliance, Intel INTC, Harley-Davidson HOG, and Shell SHEL. All were former dividend champions. For investors, these reduced, suspended, or eliminated payouts weren’t just about loss of income. They were generally accompanied by share price declines. Their cause: financial distress.

To take Dow as an example, its stock price fell nearly 37% in 2025, the year in which it cut its dividend by 50%. The chemicals producer had a decadeslong history of regular cash payments lasting through its merger with DuPont. The stock yielded more than 10% at one point.

As the maxim goes, past performance isn’t indicative of future results. Walgreens had earned the “dividend aristocrat” distinction for its near 50-year history of growing its payout at the time of its 2024 cut. 3M had a 67-year dividend track record when it made a 40% reduction that same year. Shell’s dividend history stretched all the way back to World War II before a pandemic-driven oil price collapse forced a cut in 2020.

Rather than relying on the history of dividend payments or dividend growth, equity-income investors are better off looking forward. Morningstar Indexes’ dividend screens aren’t foolproof, but they do improve the odds of avoiding dividend cuts. Below are success rates for three measures we use to identify companies at risk of reducing, suspending, or eliminating payouts (research courtesy of Saumya Gattani):

Dividend Cut Predictor 1: Payout Ratio

The payout ratio measures the percentage of a company’s earnings that it pays out in dividends. For many equity-income investors, there’s a happy medium, where the company is generously returning cash back to shareholders, but with a cushion. Indeed, we’ve found that in recent years, companies with high payout ratios were most likely to cut their dividends.

		Companies With High Payout Ratios Have Cut Dividends Most Frequently
	



		Percentage of Dividend-Payers Cutting %

Source: Morningstar Indexes. Data as of Nov. 30, 2025. Universe: Global. “Dividend cut” defined by comparing adjoining fiscal year-end dividend per share. Time period studied: 2005-25. Download CSV.

Dow’s payout ratio was certainly a red flag. According to data appearing on the Dividends tab of Dow’s stock page on Morningstar.com, its payout ratio stood at 341.5% in 2023, meaning it was paying out more than 3 times as much in dividends as it earned that year. In 2024, its payout ratio was 178%. Walgreens’ payout ratio was similarly extreme. It hit nearly 300% at the end of 2023. Unsustainable, to say the least.

		Is Your Dividend Income at Risk? Here’s How to Spot Dividend Traps

		Plus, a look at the lagging performance of healthcare and consumer defensive stocks.
	





			13m 35s
		 Sep 25, 2025

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Dividend Cut Predictor 2: Economic Moat

Morningstar’s Equity Research Team defines an economic moat as a durable competitive advantage that protects a company from competition. Roughly 1,500 companies globally fall under analyst coverage and are assigned moat ratings. Wide-moat-rated companies should be able to sustain profitability better than narrow-moat companies, and both are better positioned than no-moat companies. Moats also defend dividends, according to our research. Companies with wide moats have tended to cut dividends less frequently, and no-moat companies cut dividends most frequently.

		Wide-Moat Stocks Cut Dividends Least, No-Moat Cut Most

Source: Morningstar Indexes. Universe: Global. “Dividend cut” defined by comparing adjoining fiscal year-end dividend per share. Time Period Studied: 2005-25. Data as of Nov. 30, 2025. Download CSV.

While Dow is considered a narrow-moat business, Walgreens was classified as no-moat at the time of its cut. According to Morningstar analysts: “[W]e do not believe the company possesses any structural advantages strong enough to earn excess returns and generate returns on invested capital above its cost of capital over the next 10 years.” Unable to sustain profits in a competitive retail environment, Walgreens cut its dividend and was eventually taken out by private equity.

Dividend Cut Predictor 3: Distance to Default

Morningstar Indexes uses Distance to Default to assess financial health. A quantitative metric, it gauges the risk that the value of a company’s assets will slip below the sum of its liabilities. Distance to Default considers equity value and share-price volatility because the market sometimes sniffs out weakness long before it shows up in balance sheet numbers. Sure enough, the measure is predictive of dividend sustainability. Saumya found that the better a company’s Distance to Default score relative to sector peers, the likelier it is to sustain its payout.

		Companies With the Best Distance to Default Scores Have Been Least Likely to Cut Dividends

Source: Morningstar Indexes. Universe: Global. “Dividend cut” defined by comparing adjoining fiscal year-end dividend per share. Time period studied: 2005-25. Data as of Nov. 30, 2025. Download CSV.

In the case of Walgreens, Distance to Default flagged risk. Faced with deteriorating financial health, including a plummeting share price, the company slashed its payout to shareholders. Distance to Default is not available as a data point on Morningstar.com, though it is used as a screen in dividend benchmarks such as the Morningstar Dividend Yield Focus Index.

The Bottom Line: Successful Dividend Stock Investing Doesn’t Neglect Total Return

Tempting as they might be, the stock market’s juiciest yields are often illusory. Pursuing income at all costs—and at the expense of total return—can lead to bad outcomes. When a dividend is cut, investors typically experience a decline in both income and principal.

Over the very long term, dividend stocks have performed well; they tend to be more solid, financially secure, and sensibly managed than average. Dividend-payers remain a popular means of participating in equity markets for investors across the globe. Just beware of dividend traps.

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