1 Stock That's Nothing but a Dividend Yield Trap

Source: Mattel

Mattel is a company built on bringing joy to children, that has brands that have been adored for generations, and offers investors a tantalizing 6.5% dividend yield. Sounds appealing, doesn't it?

Well, in the words of the venerable Admiral Ackbar, it's a trap!

The struggling toymaker's once beloved brands are rapidly becoming less popular among today's youth, which has led to sharp losses in Mattel's stock and could put its sizable dividend in jeopardy of being cut in the years ahead. Should that occur, it would probably mean even more pain for Mattel's shareholders.

Children getting older youngerThe trend toward electronic gadgets and mobile gaming is making it increasingly difficult to be a traditional toymaker. Rival toy company Hasbro had this to say about the topic in its most recent annual report:

As more children (and their parents) turn to electronic devices and downloadable games for education and entertainment, it erodes Mattel's competitive advantages, such as its negotiating power with retailers and ability to command premium shelf space. Unfortunately for Mattel and its shareholders, this trend appears unlikely to reverse itself in the foreseeable future.

Losing shareBut it's not just macro-level factors that are hurting Mattel; the company is also being outmatched by rivals within the traditional toy category. Hasbro has performed far better in recent years, benefiting from its licenses for popular brands like Transformers, Marvel, and Star Wars. Unlike Mattel's core franchises, such as Barbie, which saw its sales plunge 19% in the most recent quarter, Hasbro's brands translate very well to movies and TV. With Marvel's films lighting up the box office and the upcoming Star Wars: The Force Awakens likely to be one of the top-grossing movies of all time, this gap should only continue to widen.

Another red flagEven as these factors have weighed on Mattel's financial results, the company has raised its dividend repeatedly up until this year. That's resulted in a payout ratio that's looking increasingly unsustainable. In 2014, Mattel paid out more in dividends ($515 million) than it earned in net income ($499 million). And on a cash-flow basis, Mattel allocated more than 80% of its free cash flow to dividend payments last year.

It's about to get worseMattel's ability to maintain its current dividend looks even more worrisome when you consider that it will soon be losing its contract to produce toys based on the incredibly popular Disney Princess and Frozen characters. The loss of this Disney license, which is being acquired by Hasbro, is expected to cost Mattel more than $300 million in annual revenue beginning in 2016. That sales hit will no doubt also dent Mattel's earnings and cash flow, further pressuring its dividend.

Pull up! All craft pull up! Mattel's stock price has been nearly cut in half over the past two years. Yet with industry trends moving away from the toy titan, competition from better-positioned rivals intensifying, and the possibility of a painful dividend cut becoming increasingly likely, investors may be best served by staying well clear of this trap.

The article 1 Stock That's Nothing but a Dividend Yield Trap originally appeared on Fool.com.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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