Looking at trailing dividend yields could trick investors to think those dividends are going to be repeated.
A dividend yield is only what the business paid in the last twelve months, not necessarily a prediction about what's going to happen over the next twelve months.
BHP Billiton Limited (ASX: BHP) is a great example of where this can go wrong. Management had committed to a progressive dividend policy, but the business fundamentals just couldn't support the dividend.
A high trailing dividend yield could actually suggest that the market is expecting a dividend cut in the near future. This is the yield trap.
A yield trap's share price may not necessarily decline, the current share price may already factor in all of the potential bad news. The point is that the dividend may not be secure, or as good as it looks at first glance.
Here are four examples of high-yielding dividends that could be cut:
Vocus Group Ltd (ASX: VOC) has a trailing grossed-up dividend yield of 5.73%. There is a good chance it may cut its dividend because of its earnings downgrades and the need to shore up the balance sheet.
Telstra Corporation Ltd (ASX: TLS) has a trailing grossed-up dividend yield of 10.23%. It may cut its dividend because it's currently paying out more than 100% of its profit and it has a significant pipeline of capital expenditure in the works over the next couple of years.
Select Harvests Limited (ASX: SHV) currently has a trailing grossed-up dividend yield of 11.14%. Management may cut the dividend because the almond price has dipped and also because this year's crop was smaller than expected.
Myer Holdings Ltd (ASX: MYR) currently has a trailing grossed-up dividend yield of 9.91%. The trend of Myer's profit has not been good over the last few years and its dividend has been dropping with it. The dividend could drop again as retail industry troubles continue.
Foolish takeaway
I don't have high hopes for all four of the above businesses' dividends. Telstra is the most likely to maintain its dividend out of the ones I've mentioned, but I'm not sure having a payout ratio above 100% is a good idea.
