The coffee shop was loud, but I could still hear the excitement in his voice. A friend from Jakarta had just sold a piece of land and was telling me about his plan. He had found a stock yielding 9%. Nine percent. He said it was like owning a building that paid rent every quarter without the hassle of tenants. I asked him what the company did. He paused. He said it was something in energy. Or maybe infrastructure. He wasn’t sure. He just knew the dividend was high and the price had been stable. I didn’t say anything. I remembered the first time I made that same trade.
I was in my late twenties, and I thought I had cracked the code. I found a real estate investment trust yielding 11%. The price had been flat for three years, but the dividend kept coming. I bought a pile of it. I felt smart. I was getting paid to wait. Six months later, the company cut the dividend by half. The price dropped 40% in two weeks. I sold at the bottom, of course. I had done zero work to understand how that 11% was being funded. I had just seen a big number and assumed it meant something good.
Here’s what I wish someone had shown me with a kitchen strainer. A dividend is what comes out after the company has done its cooking. If you put a strainer under the faucet, water comes out. That’s not impressive. The question is what’s happening in the kitchen. Is the company making enough money to pay that dividend? Or is it borrowing, selling assets, or just running down cash to keep the payout looking attractive? A high yield is not a sign of health. Sometimes it’s the opposite. It’s the market telling you that the water might run out.
I had a reader from Sydney who built an entire portfolio around high-yield stocks. He was retired. He needed the income. He had a spreadsheet with yields, payout dates, and his projected monthly cash flow. It looked beautiful. Then one of his holdings, a utility company that had been paying dividends for forty years, cut its payout by 60%. He called me in a panic. He hadn’t looked at the company’s debt. It had doubled in three years. The dividend was eating up 140% of free cash flow. He had been collecting his checks while the company was slowly suffocating. He sold at a loss. He told me he wished someone had told him to look past the yield.
I keep a magnifying glass in my desk drawer now. I don’t use it to read small print. I use it to remind myself to look closer. When someone tells me about a stock yielding 8% or 9%, I pull out the magnifying glass and I ask four questions. What is the payout ratio? Not the one the company reports. The one I calculate using free cash flow. Is the dividend growing or flat? A flat dividend over five years is a warning sign. What is the debt load? A company can pay a dividend for years while debt climbs, right up until it can’t. And finally, why is the yield so high? If I can’t answer that in one sentence, I don’t buy it.
The friend from Jakarta called me three months after that coffee shop conversation. He had bought the energy stock. The dividend was still 9%. But the stock price had dropped 18%. He was down on the total. He said he was thinking of buying more to average down. I asked him if he had looked at the payout ratio. He said he hadn’t. I asked him to pull up the latest report and find the free cash flow number. He called me back an hour later. The company was paying out 130% of its free cash flow in dividends. He asked me what that meant. I told him it meant the dividend was being funded by debt or asset sales. I told him it meant the 9% wasn’t real. It was just a number on a page until the company stopped paying it.
I use a small notebook now for every dividend stock I consider. I write the yield on the left page. I write the payout ratio on the right page. If the right page is blank, I don’t buy. I’ve learned that the yield is a result, not a strategy. It’s what’s left over after the company has paid its bills, reinvested in the business, and decided what to return to shareholders. If the yield looks too good to be true, it almost always is. I’m not saying high-yield stocks are all traps. I’m saying you have to know what you’re buying before you collect the check.
I still own dividend stocks. I own a few that yield between 3% and 4%. I own them because I understand the businesses. I know where the money comes from. I know what happens if the economy slows down. I don’t own anything yielding 8% anymore. Not because I think they’re all bad. Because I’ve learned that I’m not good at telling the difference between a sustainable high yield and a slow-motion collapse. I’d rather collect a smaller check that I know will keep coming.
The friend from Jakarta sold his position last week. He took a 22% loss. He texted me a screenshot of the sale confirmation with a message that just said “lesson learned.” I wrote back “welcome to the club.” I thought about sending him the kitchen strainer analogy. I didn’t. He’ll figure it out. Or he won’t. Either way, next time he sees a 9% yield, he’ll pause. That’s enough for now.
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