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Fund Spy

High Payout Ratios Come With Risk

Make sure you know how a fund achieves its high yield.

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A version of this article was published in the January 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

Equity funds with high dividend yields can be enticing to income-seeking investors. But often the higher the yields, the higher the risks, too. Yields that are well above those of the overall market tend not to be as stable. There are a number of reasons for this. First, high yields can be an indication that a company is in distress. Two or three decades ago, stocks yielding more than 5% were common. But with the S&P 500 yielding only about 2% these days, any stock with a yield greater than 7% is probably distressed and likely to cut its dividend.

Kevin McDevitt does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.