Yield Trap refers to a situation where investors are lured into buying securities, typically stocks or bonds, offering unusually high dividend or interest yields. At first glance, these high yields may seem attractive, promising better returns compared to market averages. However, they often signal underlying financial weakness or instability within the company rather than genuine profitability.

In simple terms, a yield trap occurs when a company’s stock price falls sharply while its dividend payout remains unchanged, making the dividend yield appear artificially high. Investors who focus only on this high yield may overlook the company’s declining fundamentals such as falling earnings, rising debt, or deteriorating cash flows. Over time, the company might reduce or suspend dividends, leading to capital loss for investors.

Example: Suppose a company’s share price drops from _200 to _100, but it continues to pay a _10 dividend. The yield jumps from 5% to 10%, making it seem lucrative. However, this may be due to financial distress rather than improved performance — a classic yield trap scenario.

To avoid falling into a yield trap, investors should conduct thorough fundamental analysis before investing. Key factors to review include dividend payout ratios, debt levels, cash flow consistency, and earnings stability. Sustainable dividend yields usually come from companies with consistent profitability, not from those facing short-term price declines.

In conclusion, while high yields can be tempting, it’s essential to look beyond numbers. A prudent investor focuses on a company’s overall financial health and long-term growth potential, not just attractive dividend percentages. Understanding yield traps helps safeguard your portfolio from deceptive investment opportunities and promotes disciplined, research-backed decision-making aligned with SEBI’s investor protection principles.