Related
news
13 March 2026
How Games Workshop became the best performing UK share of the last two decades6 min readAuthor12 March 2026
Magnum’s meltdown: can Unilever’s ice cream spin-off recover from a bad start?6 min readAuthor
Shares Magazine
Investors searching for income opportunities often gravitate towards funds with the highest yields. If you had the choice of either 4p or 8p in every pound in dividends, you might choose the bigger reward.
What people often neglect to consider is the importance of looking at total return. This is the money you make from dividends and the increase in the value of your fund, known as capital growth.
Occasionally, you may find a type of fund that has a lower yield, but which subsequently generates similar, or better, total returns compared to a higher yielding fund. A case in point across certain periods is the global equity investment trust sector, which is a group of trusts investing in dividend-paying companies from around the world.
The average yield on the global equity income investment trust sector is currently 3.5%, less than the 4% average yield on the UK equity income sector. An income hunter might therefore presume that the UK equity income space is preferrable if they are collecting bigger dividends than the comparative global peer group. However, that might not always be the case.
Running the numbers
AJ Bell compared the average total return from both sectors over the past five years and found roughly equivalent results. You would have made 71% total return from the growth in value of either category of trust as well as dividends, on average. In comparison, UK equity income trusts averaged a 67% total return.
Over a longer period, the global equity income trusts did considerably better, with an average 253% total return over 10 years versus 149% from UK equity income trusts. There is no guarantee this trend will remain intact, but these figures illustrate how you cannot simply judge an investment’s overall potential simply from the headline dividend yield.
In the above example, share price (aka capital) gains contributed more than dividends for the total return on global equity income trusts, on average, over the past five and 10 years. That might be down to global equity income trusts being more invested in low-yielding technology stocks versus UK equity income ones.
When times are good, it is fair to expect faster earnings growth from software and hardware companies compared to the typical company you might find on the UK stock market. There is often a correlation between the pace of earnings growth and share price growth.
‘We’re happy to invest in areas like technology, even if they have very low, or frankly, even in some cases, no dividend,’ says Stephen Anness, manager of the Invesco Global Equity Income Trust, the best performer in its category over five years. What matters to Anness is an attractive valuation at the point of investment compared what his team believe the company should be worth.
In the UK equity income space, Temple Bar also places a significant emphasis on valuation when looking for opportunities. It is the top performing investment trust in the UK equity income sector, returning 148% over five years. Temple Bar’s top holdings include a mixture of high and low-yielding stocks such as ITV which yields 6.1% and Marks & Spencer which yields 1.7%.
What is your income strategy?
If the primary reason for owning income investments is to collect a regular stream of cash, you might be happy if the bulk of returns come from dividends.
In this case, you might still prefer a fund that specifically targets high-yield investments. Certain people might see any capital growth as the cherry on top, but not essential.
If the income stream from your chosen investments is inadequate, one alternative is to sell small chunks of your fund over time to generate additional income on top of any dividends. That does not suit everyone as there are costs involved in selling funds.
For certain investors, having a blend of income and growth works fine. They collect a regular stream of dividends and hopefully the value of their capital keeps growing. This is particularly important for someone in retirement who wants their pot to last as long as they do. It is also important if you want to keep up with the cost of living, i.e. inflation.
It is worth pointing out income funds might appeal to younger investors as well as those in retirement. Certain income funds contain established, highly profitable companies that have the qualities to fight off competition, protect their market share, and grow their earnings – all attractive attributes from an investment perspective. For those who do not need the regular stream of cash from dividends, reinvesting the proceeds is a powerful way to turbocharge your ISA or pension.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
