How to Spot a Value Trap

A generous dividend payout is enticing but it’s not always a positive sign. Here's how to avoid falling into a dividend trap 

Nicki Bourliofas 17 March, 2021 | 10:00AM
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Giant bear trap

As some shares fall in price, investors need to be on the lookout for value traps. While a low price can be lure for investors, it doesn’t necessarily indicate good value and investors must know how to spot warning signs such as a disruption to the company’s business or industry.

Investors can use Morningstar’s star ratings for stocks to determine whether a company is trading above or below its fair value. Morningstar analysts' estimates of fair value consider the characteristics of the underlying business, including future cash flows and the risk inherent in the stock.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Nicki Bourliofas  Nicki Bourlioufas is an Australia-based contributor to Morningstar on personal finance