When I started building an income portfolio, I made some shocking mistakes. Most of them were the result of one thing: greed linked to a high dividend yield.
In some ways, that’s the intention of a high yield — to attract investment. Essentially, the company is rewarding you for choosing it and making a financial commitment to its success.
But that commitment comes with some serious pitfalls to consider. Let’s take a look.
A yield alone guarantees nothing
The key point to understand about a yield is that the company doesn’t set it. It simply indicates what percentage of the share price is paid out as dividends at any given moment.
When the dividend itself is set (ie: 10p per share), the share price fluctuates constantly. As a result, so does the yield.
And the worst part? As the price falls, the yield rises. An investor unaware of that correlation can get stuck holding shares that are plummeting in value.
Dividends are also not guaranteed.
Unless you were holding a share on the ex-dividend date, you won’t receive the next dividend payment. And even if so, the following dividend isn’t guaranteed — it could be cut or paused completely.
Since many companies pay quarterly, you might find your ‘high-yielding dividend gem’ is suddenly paying nothing in three months’ time.
So how can we avoid these dividend traps?
Assessing dividend viability
Unfortunately, it’s impossible to guarantee anything on the stock market. But there are ways to get a good idea about where a company is headed.
Generally, start ups or high-growth companies don’t pay dividends — they need the cash to grow the business. Dividends are preferred by highly profitable, well-established companies with more cash than they know what to do with.
A few examples on the FTSE 100 include Aberdeen Group, British American Tobacco, Rio Tinto, and Reckitt Benckiser.
But to get an idea of how to assess a dividend stock, let’s look at something lesser-known.
A FTSE 250 dividend gem
Rathbones Group (LSE:RAT) may not be a household name, but I think it’s an excellent example of what to look for in income shares.
The company started paying dividends from day one, when it went public in 1984. It has focused on shareholder returns ever since, growing dividends at a compound annual growth rate of 6.2% for the past two decades.
In 2025, it paid a full-year dividend of 99p per share, up from just 30p in 2005. Consistent growth like that is critical, otherwise, your income steadily loses value to inflation.
Still, nothing’s perfect. Rathbones faces regulatory and compliance risk, following FCA‑driven reviews of its Consumer Duty and oversight. This led to restrictions on high‑risk client onboarding and a costly remediation programme, which could impact earnings.
Importantly, its statistics look strong enough to support dividend payments:
| Metric | Rathbones Group | FTSE 250 average |
|---|---|---|
| Dividend yield | 5.80% | 3.20% |
| Operating margin | 25% | 5%-10% |
| Price-to-earnings (P/E) ratio | 9.7 | 11-13 |
| Dividend coverage | 2 times | 2.1-2.4 times |
| Dividend payout ratio | 90% | 60% |
The bottom line
When assessing stocks for income, these guidelines can help you better understand if the dividend is sustainable. Always ensure there’s enough cash to cover dividends, and that the payout ratio is sustainable.
With a high yield and heavy focus on shareholder returns, Rathbone’s figures are above average. But they’re in a sustainable range, making it a stock worth considering for an income portfolio.
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Mark Hartley owns shares in British American Tobacco and Reckitt Benckiser.
