Insights
Find the latest news and insights from TrueShares below.
How to Avoid Dividend Traps
As the economy took a downturn last year, many investors turned to dividends as a safe option for steady income. But what’s not safe is the assumption that all dividends are reliable, sustainable investment options. For example, many airlines1 cut their dividends at the beginning of the pandemic and have not reinstated them. But good dividends are out there and are usually offered by stable, well-established companies. To sort through the noise, there are several ways investors can avoid dividend traps and make wise investment decisions.
First, it is important not to let dividend yield drive decision-making. The dividend yield refers to the dividend amount in relation to the stock price. While a high dividend yield is tempting, it might signal unhealthy financial circumstances for the company. Many companies increase or begin offering dividend payments to compensate shareholders2 for stagnant or declining stock prices. Such behavior would indicate an unsustainable dividend and little future upside potential.
Instead, investors and portfolio managers should look at the dividend payout ratio. The dividend payout ratio1 represents the dividends paid to shareholders in relation to the company’s net earnings. An ideal dividend payout ratio is around or under 50%, which gives the company enough wiggle room for a safety net as well as significant capital to reinvest for future growth.
A ratio closer to 100%1 is a sign that the company is funneling nearly all of its net income to meet dividend payments. The company might also therefore need to borrow money and take on debt to pay those dividends. A high payout ratio can indicate that a cut is coming, but it also speaks more broadly to the mismanagement of funds on behalf of the company’s leadership. Companies with lower dividend payout ratios likely have lower dividend yield, but may therefore have greater share price appreciation over time as they reinvest their earnings in the business.
However, high and low payout ratios can be relative. It is important to compare dividend payout ratios within similar sectors1 to get an accurate picture of the stock’s health. Utilities and consumer goods companies tend to pay higher payout ratios because they have more stable cash flow. Tech companies tend to pay lower dividend payout ratios because they need to reinvest to keep up with constant changes in the industry.
It is not enough to merely look at the dividend payout ratio and expect to know if a company makes for a wise investment. Portfolio managers should use fundamentals to look at the underlying business practices, dividend history, earnings growth, and profit margin among other characteristics of health. Companies that pay predictable and steady dividends tend to also have a steady business model, but only fundamentals will tell an investor how a company is spending its money and whether or not those practices should be relied upon by shareholders.
The TrueShares Low Volatility Equity Income ETF relies on fundamentals to provide investors with healthy dividend exposure. The DIVZ portfolio manager maintains a concentrated portfolio of 25 to 35 well-managed companies in order to dig into the details of each individual holding. DIVZ aims to avoid the common dividend traps to provide low volatility with long-term upside potential investors can expect.
Thought Leadership,
Straight to Your Inbox
Disclosures
©2025, TrueShares, ©2025 TrueMark Investments, LLC. (“TrueMark”).
Before investing, carefully consider the TrueShares ETFs investment objectives, risks, charges and expenses. Specific information about TrueShares is contained in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.www.true-shares.com. Read the prospectus carefully before you invest.
An investment in TrueShares is subject to numerous risks, including possible loss of principal. The ETFs are subject to the following principal risks: Authorized Participants, Market Makers, and Liquidity Providers Concentration Risk associated with ETFs; Equity Market Risk; Management Risk; Market Capitalization Risk (Large Cap; Mid Cap, Small Cap Stock); Market Risk; New Fund Risk: The Fund is a recently organized, non-diversified management investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. Additionally, the Adviser has not previously managed a registered fund, which may increase the risks of investing in the Fund.
Depositary Receipts Risk. American Depositary Receipts (“ADRs”) have risks similar to those of foreign securities (political and economic conditions, changes in the exchange rates, etc.) and entitle the holder to all dividends and capital gains that are paid out on the underlying foreign shares.
Individual investors should contact their financial advisor or broker dealer representative for more information on TrueShares ETFs.
Investment Products and Services are: NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE.
All registered investment companies, including TrueShares, are obliged to distribute portfolio gains to shareholders at year-end regardless of performance. Trading in TrueShares ETFs will also generate tax consequences and transaction expenses. The information provided is not intended to be tax advice. Tax consequences of dividend distributions may vary by individual taxpayer.
TrueShares ETFs are bought and sold through exchange trading at market price, not Net Asset Value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
ETF shares may be bought or sold throughout the day at their market price, not their NAV, on the exchange on which they are listed. Shares of ETFs are tradable on secondary markets and may trade either at a premium or a discount to their NAV on the secondary market. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s NAV. Brokerage commissions and ETF expenses will reduce returns.
Fund Intelligence Mutual Fund Industry and ETF Award shortlists and winners are comprised of individuals and firms who have submitted entries or been nominated via the online submission process, as well as through recommendations from leading market participants. Fund Intelligence Mutual Fund Industry and ETF Award judges will use the submitted application material, as well as any uploaded supplemental information, to determine which firm, individual or product they believe to be the most suitable and deserving winners for each category. Fund Intelligence Mutual Fund Industry and ETF Award judges have the discretionary power to move nominations into alternative categories that they think may be more suitable. Fund Intelligence Mutual Fund Industry and ETF Awards were decided by an independent panel of 20 judges with expertise across the asset management space.
TrueShares ETFs (the “Funds”) are registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940. The fund is distributed by Paralel Distributors LLC, Member FINRA. Paralel is not affiliated with TrueMark Investments, LLC. TrueMark Investments, LLC, is the investment advisor to the Funds and receives a fee from the Funds for its services.
TrueMark Investments, LLC is the investment advisor to the Funds and receives a fee from the Funds for its services.
TrueShares ETFs are offered only to United States residents, and information on this site is intended only for such persons. Nothing on this website should be considered a solicitation to buy nor an offer to sell shares of any fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.