After I began constructing an earnings portfolio, I made some stunning errors. Most of them had been the results of one factor: greed linked to a excessive dividend yield.
In some methods, that’s the intention of a excessive yield — to draw funding. Basically, the corporate is rewarding you for selecting it and making a monetary dedication to its success.
However that dedication comes with some severe pitfalls to contemplate. Let’s have a look.
A yield alone ensures nothing
The important thing level to grasp a couple of yield is that the corporate doesn’t set it. It merely signifies what proportion of the share value is paid out as dividends at any given second.
When the dividend itself is ready (ie: 10p per share), the share value fluctuates always. Consequently, so does the yield.
And the worst half? As the worth falls, the yield rises. An investor unaware of that correlation can get caught holding shares which might be plummeting in worth.
Dividends are additionally not assured.
Until you had been holding a share on the ex-dividend date, you gained’t obtain the following dividend cost. And even when so, the next dividend isn’t assured — it might be minimize or paused fully.
Since many firms pay quarterly, you would possibly discover your ‘high-yielding dividend gem’ is abruptly paying nothing in three months’ time.
So how can we keep away from these dividend traps?
Assessing dividend viability
Sadly, it’s not possible to ensure something on the inventory market. However there are methods to get a good suggestion about the place an organization is headed.
Usually, begin ups or high-growth firms don’t pay dividends — they want the money to develop the enterprise. Dividends are most well-liked by extremely worthwhile, well-established firms with additional cash than they know what to do with.
A number of examples on the FTSE 100 embrace Aberdeen Group, British American Tobacco, Rio Tinto, and Reckitt Benckiser.
However to get an thought of methods to assess a dividend inventory, let’s have a look at one thing lesser-known.
A FTSE 250 dividend gem
Rathbones Group (LSE:RAT) is probably not a family identify, however I believe it’s a wonderful instance of what to search for in earnings shares.
The corporate began paying dividends from day one, when it went public in 1984. It has targeted on shareholder returns ever since, rising dividends at a compound annual development charge of 6.2% for the previous twenty years.
In 2025, it paid a full-year dividend of 99p per share, up from simply 30p in 2005. Constant development like that’s important, in any other case, your earnings steadily loses worth to inflation.
Nonetheless, nothing’s excellent. Rathbones faces regulatory and compliance threat, following FCA‑pushed critiques of its Shopper Responsibility and oversight. This led to restrictions on excessive‑threat consumer onboarding and a expensive remediation programme, which may influence earnings.
Importantly, its statistics look robust sufficient to assist dividend funds:
| Metric | Rathbones Group | FTSE 250 common |
|---|---|---|
| Dividend yield | 5.80% | 3.20% |
| Working margin | 25% | 5%-10% |
| Value-to-earnings (P/E) ratio | 9.7 | 11-13 |
| Dividend protection | 2 instances | 2.1-2.4 instances |
| Dividend payout ratio | 90% | 60% |
The underside line
When assessing shares for earnings, these pointers may also help you higher perceive if the dividend is sustainable. All the time guarantee there’s sufficient money to cowl dividends, and that the payout ratio is sustainable.
With a excessive yield and heavy concentrate on shareholder returns, Rathbone’s figures are above common. However they’re in a sustainable vary, making it a inventory price contemplating for an earnings portfolio.
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Mark Hartley owns shares in British American Tobacco and Reckitt Benckiser.
