9% High Dividend Stock Falls to Zero…! 3 Lessons I Learned & How to Avoid Investment Risks

[High Dividend Investing Pitfalls] What I Learned from a Dividend Cut – The “High Yield Trap” Explained

What You Will Learn from This Article

✅ What is the "dividend cut risk" of high dividend stocks?
✅ Characteristics of stocks that fall to zero dividends and how to identify them
✅ Why choosing based on yield alone is dangerous & how to pick safer stocks
✅ When to cut losses and the importance of risk management

Many investors assume that high dividend stocks = stable income, but the reality is that some of these stocks carry the risk of falling to zero dividends (dividend cut).

I personally experienced this early in my investing journey when I invested in Lumen Technologies (LUMN)—a high-yield stock that ultimately cut its dividend and saw its stock price collapse. That painful lesson helped me recognize risks more effectively. So when I saw the recent NextEra Energy Partners (NEP) dividend cut news, I realized that if I had owned the stock, I would have certainly sold it immediately.

In this article, I will share my real-life experience and how to identify stocks at risk of cutting dividends. If you are already investing in high-yield stocks or considering it, these insights will help you avoid unnecessary losses and make better investment decisions.

1. My Costly Mistake: Lumen Technologies (LUMN) Dividend Cut

When I first started investing in high-dividend U.S. stocks, I bought Lumen Technologies (LUMN), a telecom company that appeared to be a solid investment.

📌 Lumen Technologies (LUMN) Company Overview

📉 Why Did I Invest in LUMN?

❌ Over 10% dividend yield – too tempting to ignore!
❌ Telecom industry seemed stable… so it must be safe, right?
❌ Potential for long-term growth (or so I thought).

I fell into the common trap of thinking,
“A 10%+ dividend yield? This is a great way to grow my money effortlessly!”

However, the reality was…

• 2022: Dividend cut to zero
• Stock price collapsed (from $30+ to single digits)
• Lost both dividend income and a significant portion of my investment capital

It was a classic case of falling into the "high dividend yield trap."

2. The NEP Dividend Cut Scare… But My Lesson Paid Off

After my experience with LUMN, I became more cautious in selecting high dividend stocks and learned to spot potential risks. Thanks to this, I was able to avoid investing in NextEra Energy Partners (NEP) before its dividend cut.

📌 [Related News]: NextEra Energy Partners Dividend Cut – Yahoo Finance

📌 NextEra Energy Partners (NEP) Company Overview

📉 NEP's Dividend Cut News (2024)

🔻 A 9% high-yield stock suddenly stopped paying dividends
🔻 Rising interest rates made it difficult to secure funding
🔻 As a result: stock price fell & dividends went to zero

If I hadn’t learned from my LUMN mistake, I might have invested in NEP as well. But this time, I recognized that high yields often come with hidden risks and avoided the trap.

3. Common Characteristics of Dividend-Cut Stocks

What do stocks like LUMN and NEP have in common? Here are the key warning signs:

① Extremely High Dividend Yields (8–10%+)

📌 Why is this risky?
→ The market may already be pricing in a future dividend cut.
When a stock's price drops significantly, its dividend yield appears high, but this often signals that the market expects dividends to be unsustainable.

📌 Examples:

• LUMN (Before the cut: over 10%)
• NEP (Before the cut: ~9%)

✅ Solution:
Always investigate why a stock’s dividend yield is so high.

② Payout Ratio Above 80%

📌 Why is this risky?
→ If a company is paying out nearly all of its profits as dividends, any downturn in earnings could force a dividend cut.

📌 Examples:

• LUMN → Payout ratio exceeded 100% (paid dividends even when in the red)
• NEP → Insufficient free cash flow to sustain dividends

✅ Solution:
📌 Choose stocks with a payout ratio of 50% or lower
📌 Check if free cash flow (FCF) is positive

③ Business Model Highly Sensitive to Interest Rate Hikes

📌 Why is this risky?
→ Companies that rely heavily on debt financing struggle when interest rates rise.

📌 Sectors to Watch Out For:
⚠ MLPs (Pipeline companies)
⚠ REITs (Real estate investment trusts)
⚠ Infrastructure companies (e.g., NEP – renewable energy sector)

✅ Solution:
📌 Check the debt-to-equity ratio (D/E ratio)
📌 In rising interest rate environments, focus on financially strong companies

4. What to Do If a Stock Cuts Its Dividend?

If a stock you own suddenly stops paying dividends, consider these options:

✅ Sell immediately if:

• The company has no clear path to recovery (e.g., LUMN)
• Dividends were the main reason for holding the stock
• The company is heavily in debt & has weak future prospects

✅ Hold & monitor if:

• The dividend cut is due to temporary earnings decline (e.g., Coca-Cola in the past)
• The company has a history of dividend growth & strong fundamentals

5. Conclusion: Avoiding the High-Yield Trap

Many investors fall into the high-yield trap, investing in stocks with unsustainable dividends.

However, I view my experience with LUMN as a valuable learning opportunity. It helped me avoid repeating the same mistake with NEP and refine my dividend investing strategy.

Key Takeaways:

✔ Be cautious of yields above 8%
✔ Choose stocks with a payout ratio below 50%
✔ Avoid companies with excessive debt in rising interest rate environments

By following these principles, you can invest in high dividend stocks safely and profitably!