Some high-yield dividend shares can make a tempting addition for a Stocks and Shares ISA, especially if setting up passive income streams is important to you.

But not all high-yield shares are created equal – or anywhere near equal.

When looking for shares to consider for my portfolio, here are some key elements from my checklist.

Do you understand the company?

Putting money into a business you do not understand is not investing. It is trading.

Like billionaire investor Warren Buffett, I aim to stay inside my circle of competence when investing my ISA.

That can be difficult when high yields tempt me. But it is as important then as ever.

Look at the free cash flows and where they may go

A company can pay dividends for a short time even if it does not generate enough free cash flow to fund them.

Over the long run though, for a company to sustain dividends at a given level, it needs to have enough spare cash to cover them.

So I dig into a company’s business model and its balance sheet, assessing its prospects.

Consider how repeatable cash flows seem

Even doing that does not always give the full picture.

Some companies generate free cash flows from their ordinary course of business. For others, some free cash flows may come from selling off assets, borrowing money or raising funds in other ways, such as issuing new shares.

None of that necessarily makes a dividend unattractive to me. After all, if a company buys a piece of land for one sum and later decides it is surplus to requirements and can be sold at a healthy profit, that strikes me as a useful source of cash.

But it can be helpful for an investor to differentiate between what they regard as likely to be recurring sources of free cash flow and what look like one-offs (companies sometimes make this easier by labelling certain profits or capital gains as exceptional).

This can be particularly difficult, by the way, for high-yield investment trusts that specialise in investing in companies hoping to sell their stake for a higher price in future, funding dividends.

Remember – like Buffett – if you get to the point where you feel you cannot properly understand a company’s business or accounts, it may be wise either to stay away from it, or to learn more until your understanding gets to the right level.

Putting the theory into practice

As an example of applying this thinking, one high-yield share that I think merits consideration is Greencoat UK Wind (LSE: UKW).

The business model here is fairly simple to understand, as the investment fund basically invests in renewable energy assets.

Still, there are some twists.

For example, what is future national energy policy likely to be and what might that mean for the company’s earnings? Tax changes this year and policy uncertainty have both negatively affected sentiment towards the share, as I see it. They are an ongoing risk.

That explains why the share price currently sits at a steep 19% discount to net asset value.

That means the share is attractively priced in my opinion, though. A lower share price – it has fallen 18% in five years – and dividend growth have helped push the yield up to a tasty 9.6%.

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Christopher Ruane does not hold any positions in the companies mentioned.