High dividend yield looks attractive, but it can be misleading on its own. A stock whose price has dropped 50% will mathematically show doubled dividend yield — this is called a dividend trap. Truly sustainable dividend income requires evaluating yield alongside quality metrics.
What Is a Dividend Trap?
Dividend yield = Dividend / Stock price. If the stock price drops 50%, the yield automatically doubles — but this high yield signals the company is in trouble. The company may cut or eliminate dividends next year. Investing based solely on dividend yield increases the risk of falling into this trap.
Why Quality Filters Matter
Quality filters assess whether dividend payments are sustainable. Key criteria: positive ROE — is the company profitable; positive net margin — does it actually make money from sales; debt/equity below sector median — not over-leveraged; earnings stability — consistent profits over recent years. High-yield stocks that pass these filters have the capacity to sustain their dividend payments.
Dividend + Quality Portfolio on BIST
Borsafolio's Dividend + Quality portfolio works as follows: first, quality filters are applied (positive ROE, positive net margin, debt/equity below sector median). Then remaining stocks are ranked by dividend yield and the top 20 are selected. This dual-filter approach avoids dividend traps while offering high and sustainable income potential.
Tax Considerations
In Turkey, dividend income is subject to 10% withholding tax. However, stock trading gains are tax-exempt for individual investors. Some investors therefore prefer capital gains over dividends for tax efficiency. Both approaches have merits — dividends provide regular cash flow while capital gains offer tax efficiency.
Related articles: Best BIST Dividend Stocks, What Is Factor Investing?, Fundamental Analysis Guide, BIST Stocks vs TEFAS Funds, What Are Mutual Funds?, What Is an ETF?, What Are Index Funds?.
