The Negative Carry Trap
Cash is no longer trash. As of this morning, December 1, 2025, the 10 Year Treasury yield sits at a stubborn 4.18 percent. Meanwhile, the S&P 500 Dividend Aristocrats Index is limping along with a yield of just 2.5 percent. This is a negative carry. Investors are essentially paying for the privilege of taking equity risk while receiving nearly 170 basis points less in income than they would from a risk-free government bond. The math does not add up for the passive income crowd.
Wall Street is currently drunk on the prospect of a soft landing, but the data tells a grimmer story about payout sustainability. We are seeing a dangerous divergence between net income and free cash flow (FCF). While earnings per share (EPS) might look stable on a spreadsheet, the actual cash flowing into corporate coffers is being diverted to service debt and settle massive legal liabilities. If you are buying dividend stocks today based on historical yields, you are driving by looking in the rearview mirror.
The Free Cash Flow Mirage
The biggest risk in the current market is the payout ratio. Take 3M (MMM), which recently reset its quarterly dividend to $0.73 per share following the spin-off of its healthcare unit and the finalization of multi-billion dollar legal settlements. While some analysts call this a bottom, the skeletal remains of the company are now paying out roughly 40 percent of adjusted free cash flow. This sounds safe until you factor in the 13 year payment schedule for PFAS and earplug litigation. Every dollar sent to shareholders is a dollar that cannot go toward the R&D needed to fix a stagnant industrial core.
Then there is the case of Procter & Gamble (PG). With 69 years of consecutive increases, it is the ultimate safety play. However, per Bloomberg yield data, P&G is trading at a premium multiple that yields barely 2.9 percent. Its free cash flow payout ratio has crept toward 70 percent in 2025. This leaves zero margin for error if commodity prices spike or if consumer spending in the luxury tier continues to soften. You are paying for a bond substitute that carries all the volatility of a consumer staple stock with none of the capital appreciation potential of a growth name.
| Ticker | Current Yield | FCF Payout Ratio | Risk Assessment |
|---|---|---|---|
| PG | 2.98% | 70.3% | Overvalued Safety |
| MMM | 2.82% | 40.0% | Legal Liability Hangover |
| TGT | 4.60% | 55.0% | Consumer Weakness Exposure |
| KO | 2.90% | 67.0% | Low Growth Ceiling |
The Energy Yield Trap
Oil majors like ExxonMobil (XOM) and Chevron (CVX) are flush with cash after a year of disciplined capital expenditure, but they are playing a dangerous game with shareholder expectations. If crude prices stabilize below $70 per barrel, those aggressive buyback programs and high dividends will be the first things on the chopping block. According to recent Reuters market briefs, global demand is softening, yet these stocks are priced for a perpetual energy crisis. The yields look attractive today, but they are cyclical dividends masquerading as structural ones.
Contrarian investors should be looking at the payout coverage, not the headline yield. A 2 percent yield with a 30 percent payout ratio is infinitely safer than a 5 percent yield with an 85 percent payout ratio. The latter is a “yield trap” where the stock price usually drops by more than the dividend payment, resulting in a net loss. This is exactly what we are seeing in the utility sector right now. Companies like Avista (AVA) are grappling with payout ratios north of 86 percent as they struggle to fund infrastructure upgrades in a high-interest environment.
The Federal Reserve has already cut rates three times in late 2024 and 2025, yet long-term yields have not collapsed. This tells us that the market expects inflation to remain sticky, hovering around 2.7 percent. If you are holding a dividend stock that grows its payout by 3 percent while inflation is at 2.7 percent, your real return is essentially zero. You are running as fast as you can just to stay in the same place.
The December Milestone
The true test for income portfolios arrives on December 17, 2025. That is when the FOMC will release its final interest rate decision and dot plot for the upcoming year. If the Fed signals a pause in rate cuts due to persistent inflation, the 10 Year Treasury could easily spike back toward 4.5 percent. Such a move would trigger a massive liquidation of “safe” dividend stocks as investors realize they are taking equity risk for an inferior yield. Watch the 4.25 percent level on the 10 Year Treasury; if we close above that this week, the dividend aristocrats will be the first to bleed.
