Source: Mattel

Mattel (NASDAQ:MAT) 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 younger
The trend toward electronic gadgets and mobile gaming is making it increasingly difficult to be a traditional toymaker. Rival toy company Hasbro (NASDAQ:HAS) had this to say about the topic in its most recent annual report:

We contend with the phenomenon that children are increasingly sophisticated and have been moving away from traditional toys and games at a younger age. Thereby, the variety of product and entertainment offerings available for children has expanded and product life cycles have shrunk as children move on to more sophisticated offerings at younger ages. This has been referred to as "children getting older younger" but may also be referred to as developmental compression. As a result, our products not only compete with those offerings produced by other toy and game manufacturers; we also compete, particularly in meeting the demands of older children, with entertainment offerings of many technology companies, such as makers of tablets, mobile devices, video games and other consumer electronic products.

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 share
But 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 flag
Even 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 worse
Mattel'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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.