The appeal of dividend investing has long been rooted in its promise of dependable income, especially in uncertain markets. For generations, income-focused investors have been drawn to the steady rhythm of quarterly payouts from companies deemed reliable. These dividends offer more than just a yield—they represent a sense of financial security, a reward for patience, and a lifeline for retirement portfolios. Yet, behind the polished sheen of some of these companies lies a deeper, more uncomfortable truth. Not all dividend stocks are safe, and in the hunt for passive income, many investors fall into the seductive but dangerous pitfall of what are called dividend traps.
It’s a mistake that even seasoned investors have made. Consider, for a moment, names like 3M, Shell, Intel, and Walgreens. These are not obscure companies buried in the corners of the market; they are household names with decades of brand recognition and track records that once made them the darlings of dividend-focused portfolios. Some of them had been regarded as dividend aristocrats—companies that had raised their payouts annually for 25 years or more. Yet all of them have reduced or eliminated their dividends since 2020. The reason? Financial strain that couldn’t be hidden behind glossy investor presentations or decades of payout history.
Take Walgreens Boots Alliance, for example. A brand so deeply embedded in the American retail landscape that nearly three-quarters of Americans live within five miles of one of its stores. For many, it’s more than a pharmacy—it’s a routine part of everyday life. Its towering presence in suburban strip malls, its long-standing legacy, and its formerly generous dividend made it seem like a fortress of income security. And yet, beneath that façade, things were starting to unravel.
In the years leading up to its dividend cut, Walgreens embarked on an aggressive acquisition strategy. With ambitions to diversify and expand its healthcare footprint, the company acquired assets like VillageMD and Summit Health, layering on complexity in an already challenging retail landscape. The problem wasn’t just expansion—it was integration. Merging disparate systems, cultures, and strategies while simultaneously navigating shrinking margins from pharmacy benefit managers created a perfect storm. Add to that a sharp shift in consumer behavior, a decline in brick-and-mortar traffic, and heightened competition from digital-first health providers, and the cracks in the foundation became increasingly visible.
The stock’s trajectory told a sobering story. In 2022, as markets roiled under the weight of inflation fears and geopolitical instability, Walgreens’ share price faltered. While the broader equity market recovered in 2023, fueled by enthusiasm over artificial intelligence and new economic cycles, Walgreens fell further—shedding nearly a quarter of its value that year. For income investors, however, the eye-catching dividend yield—approaching 9%—was too tempting to ignore. A yield that high, paired with the company’s 50-year history of uninterrupted dividends, created a mirage of strength. Many investors, clinging to the narrative of the past, loaded up on shares.
But what goes up unsustainably must come down. In January 2024, Walgreens announced a painful dividend reduction, cutting its quarterly payout nearly in half. For investors who had bought in for income, the blow was immediate and severe. The share price plummeted further, and by the end of 2024, it had lost 60% of its value. In March of 2025, in a development that would’ve seemed unimaginable a decade prior, the company was acquired by private equity firm Sycamore Partners—marking the end of an era for one of America’s most recognizable brands.
What happened at Walgreens wasn’t just an isolated case of corporate mismanagement. It was a textbook example of a dividend trap—a company whose payout seemed secure but was, in reality, a ticking time bomb. High dividend yields can mask deeper structural issues. In fact, a rising yield is often a symptom of falling share prices, which can be a red flag if the company’s earnings aren’t keeping pace. Income investors, especially those managing retirement portfolios or relying on dividend payouts for lifestyle expenses, are particularly vulnerable to these traps.
The consequences go beyond the immediate loss of income. When a company slashes its dividend, it signals weakness. Market participants often interpret such moves as an admission that the business cannot sustain itself on its current course. Share prices react accordingly, and what was once a source of steady passive income becomes a double blow—shrinking payouts and depreciated principal.
It’s tempting to lean on dividend history as a shield. After all, if a company has paid dividends for decades, doesn’t that suggest stability? Not necessarily. Historical strength is not predictive. 3M paid a dividend for 67 years before reducing it in 2024. Shell, whose dividend had withstood the shocks of global wars, economic recessions, and oil crises, finally buckled in 2020 under the pressure of collapsing energy prices during the pandemic. The assumption that the past guarantees the future is a dangerous one, especially when crafting an income portfolio intended to weather economic cycles.
This reality leads us to a more strategic question: how can investors avoid falling into dividend traps while still building a resilient income portfolio? The answer lies not in avoiding dividends altogether but in evaluating them with sharper tools and a forward-looking mindset.
The payout ratio is one such tool—simple on the surface but revealing when applied diligently. It measures the proportion of a company’s earnings paid out as dividends. A company with a payout ratio of 50% is returning half of its earnings to shareholders and retaining the rest for reinvestment or to weather downturns. When that ratio climbs above 100%, it’s a sign that the company is paying more than it earns—borrowing or depleting reserves just to meet dividend expectations. Walgreens’ payout ratio at the end of 2023 was a staggering 290.91%, an unmistakable warning sign. In hindsight, it was clear the dividend was unsustainable, yet many ignored the math in favor of the narrative.
Another critical consideration is the strength of a company’s economic moat—its ability to defend profits from competition over the long haul. A wide moat reflects advantages like brand power, cost efficiencies, intellectual property, or high switching costs. These factors can stabilize cash flows and protect dividends during industry downturns. Companies with wide moats have historically shown greater dividend resilience, while those with no identifiable moat are far more likely to cut their payouts in tough times. Investors who concentrate their income portfolios in companies with competitive durability are often better positioned to weather the storm.
Yet even these tools are not foolproof. Investing for income requires an understanding that no metric can fully eliminate risk. Payout ratios fluctuate with earnings volatility, and moats can erode over time as new competitors enter the fray or consumer preferences shift. The key is not to eliminate risk but to manage it intelligently—balancing yield with financial health, past performance with forward-looking analysis, and narrative comfort with hard data.
One of the subtler lessons from the Walgreens saga and other dividend cuts in recent years is the emotional component of dividend investing. There’s a comfort in predictability—a check arriving every quarter, a sense of ownership in a mature business. But this comfort can become a liability when it blinds investors to warning signs. Loyalty to a brand, admiration for its past achievements, or proximity to its products can cloud financial judgment. Successful income investors separate sentiment from strategy. They ask whether the company’s current operations support its dividend, whether its capital allocation makes sense, and whether its leadership is making the hard decisions necessary for long-term stability.
There’s also a broader shift in how dividends should be viewed in today’s evolving financial landscape. In a world of low bond yields, rising volatility, and disruptive innovation, the role of dividend stocks has changed. They are no longer just vehicles for yield—they’re integral parts of a diversified financial plan. But with that comes the responsibility to apply scrutiny. Investors must ask whether the income they’re receiving is truly sustainable, whether the growth of those dividends is aligned with the company’s fundamentals, and whether their portfolio is resilient enough to withstand future shocks.
Smart financial planning, especially for those in or near retirement, requires more than just chasing yield. It demands a framework that balances income with preservation of capital. This might include diversifying across sectors, limiting exposure to companies with stretched balance sheets, and periodically revisiting the assumptions behind each holding. Passive income is a powerful concept, but like all things in investing, it thrives best when coupled with active oversight.
In the end, the best defense against dividend traps is a mindset—not of fear, but of vigilance. The goal isn’t to abandon dividend investing, but to pursue it with open eyes and sharper tools. Dividend aristocrats may still play a role, but their crowns are not invincible. The market is littered with former champions who stopped growing, lost their edge, or stretched themselves too thin in the pursuit of growth.
For the discerning investor, the promise of passive income remains strong. But it comes with a responsibility to go beyond yield, beyond history, and beyond comfort. Only then can dividend investing become not just a source of cash flow, but a cornerstone of long-term wealth.