Sedimentation is a leading global problem that affects the environment and dams by reducing the live storage capacity of reservoirs and the life expectance of dams. Hence, prioritizing watersheds according to the risk of soil loss is crucial for extending the useful life of dams and reservoirs. The objectives of this study were to assess sediment flow in the Genale Dawa-3 reservoir, identify subbasins that are prone to soil erosion, and evaluate the impact of different management practices on minimizing sediment yields by using the Soil and Water Assessment Tool (SWAT) model. The SWAT model was calibrated and validated by observed streamflow and sediment data based on the SUFI-2 algorithm by SWAT-CUP, and its performance was assessed. The model simulated the average annual sediment yield; the input to the reservoir was 16.83 ton/ha/yr for the period of 1990–2015. From a total of 31 subbasins, 12 were categorized from high to very severe (11–60 ton/ha/yr) sediment-yielding subbasins and selected for sediment management. The simulated scenarios showed that the average annual sediment reductions at critical erosion hot spots in subbasins after the application of filter strips, soil/stone bund, terracing, and contour farming were 35.03%, 66.54%, 80.88%, and 53.11%, respectively. Therefore, this study concluded that reducing sediment yield by implementing terracing in critical areas at risk of soil erosion was more effective than other soil conservation measures. Overall, this research can help planners and decision-makers to implement appropriate soil conservation measures in the most erosive subwatersheds in order to extend the useful life of the Genale Dawa-3 hydropower dam and reservoir.