When I started building my income portfolio, I made some shocking mistakes. Most of them were due to one thing: greed combined with a high dividend yield.

In a sense, this is the purpose of high profit – to attract investment. Essentially, the company rewards you for choosing that company and making a financial commitment to its success.

But this commitment comes with some solemn pitfalls that need to be taken into account. Let’s take a look.

The yield itself does not guarantee anything

The key issue with profitability is that the company does not determine it. It simply indicates what percentage of the share price is paid out as dividends at a given time.

When the dividend itself is fixed (i.e. 10p per share), the share price is subject to constant fluctuations. As a result, efficiency also increases.

And the worst part? When the price falls, efficiency increases. An investor unaware of this correlation may be stuck holding a stock whose value plummets.

Dividends are also not guaranteed.

If you did not own any shares on the ex-dividend date, you will not receive another dividend payment. And even if it does, the next dividend is not guaranteed – it may be cut or stopped altogether.

Since many companies pay quarterly, you may find that your “high-yield dividend gem” suddenly pays nothing within three months.

So how can we avoid the dividend pitfalls?

Dividend profitability assessment

Unfortunately, nothing can be guaranteed on the stock market. However, there are ways to get a sense of where your company is heading.

Generally, startups or high-growth companies don’t pay dividends – they need cash to grow the company. Dividends favor highly profitable, established companies with more cash than they know what to do with.

Some examples on FTSE100 switch on Aberdeen Group, British-American tobacco, RioTintoAND Reckitt Benckiser.

But to get an idea of ​​how to evaluate dividend stocks, let’s look at something less well-known.

FTSE 250 Dividend Gem

Rathbones Group (LSE:RAT) may not be a household name, but I think it’s a great example of what to look for in an income share.

The company began paying dividends from the first day it went public in 1984. Since then, it has focused on shareholder returns, increasing its dividend at a compound annual growth rate of 6.2% over the past two decades.

It paid a full-year dividend of 99p per share in 2025, up from just 30p in 2005. This constant growth is crucial, otherwise your income will continually lose value due to inflation.

Still nothing is perfect. Rathbones faces regulatory and compliance risks as a result of the FCA’s reviews of consumer obligations and supervision. This has led to restrictions on onboarding high-risk customers and a costly remediation program, which could impact profits.

Importantly, its stats look powerful enough to support dividend payments:

The most critical thing

When evaluating stocks for income, these guidelines can assist you better understand whether the dividend is sustainable. Always make sure there is enough cash to cover the dividend and that the payout ratio is stable.

With a high rate of return and a powerful focus on shareholder returns, Rathbone’s performance is above average. However, their value is within a sustainable range, making this stock worth considering for an income portfolio.

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Mark Hartley owns shares in British American Tobacco and Reckitt Benckiser.