Different ways investments generate income for you

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Shares Magazine

12 February 2026

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Income investors seeking true diversification should consider more than just whether a fund invests in shares, bonds or other asset classes when making choices for a pension or ISA.

It’s important to look at how a fund generates an income stream for investors, as it isn’t always as straightforward as passing on dividends from investments inside its portfolio. Certain funds have extra tricks up their sleeve which widen the potential for income generation.

Method 1: The traditional route

The traditional model for an equity income fund – one that invests in stocks and shares – is to identify companies that pay generous dividends. The fund will collect the income paid out by the companies in its portfolio and distribute them to its investors, typically once every three or six months.

With these types of funds, a fund manager might look at stocks with above-average dividend yields and pick 50 or 100 of them to form their portfolio. They would consider factors such as a company’s financial strength, its cash flow, and its ability to sustain or even grow dividends from their current level.

It is common to see companies pay generous dividends when they haven’t got big demands on their cash flow elsewhere.

Heavily indebted companies might need cash flow to pay down borrowings. Certain companies might need to keep spending on technology or new equipment, and so dividends might less of a priority.

For others, they might not need have huge investment demands to sustain their business and so they can hand more cash to shareholders in the form of dividends.

Method 2: Blending income and growth 

Looking at the FTSE 100 index of UK companies, the top dividends yields are in sectors like life insurance and tobacco where earnings growth might be pedestrian. Such companies might enjoy steady cash generation and the act of paying a high yield helps to make their shares more attractive to investors.

Certain investors might also want an element of faster growing companies in their portfolio to add a different flavour. For example, you might have already retired but are healthy and want your pension to keep growing for years to come. Therefore, you might focus on both capital growth and income, and there are specific types of funds that have their fingers in both pies.

You can find investment trusts that offer blend both income and growth styles. These typically sit in the AIC’s global equity income sector and the largest is JPMorgan Global Growth & Income with £3.5 billion of assets.

A fund manager employing this kind of investment strategy will pull together a mix of most generous dividend payers with faster growing companies that might only pay a modest dividend, or not one at all. The portfolio has two different engines, one designed to drive income and the other capital growth.

This approach typically gives the fund manager a bigger investment universe from which to pick opportunities than someone running a vanilla equity income fund. 

You might expect a lower overall yield for such an approach, particularly if certain holdings only pay tiny dividends, yet this isn’t necessarily true.

The AIC global equity income sector yields 3.8% on average, yet JPMorgan Global Growth & Income has a 4% yield. It helps to fund this higher dividend through topping up the natural income from its underlying portfolio with profits it has made from selling investments at a higher price than    originally paid.

Method 3: Keeping money back in reserve 

Investment trusts can keep up to 15% of the income they receive from their holdings each year in reserve. This means they can top up dividend payments during lean years and provide a smoother stream of income for investors.

This is not an excuse for fund managers to invest in companies with potentially volatile earnings and dividends. Fund managers will still strive to find solid businesses that have the capacity to deliver sustainable dividends; the reserves function merely acts as a ‘just in case’ fallback in the event of any unforeseen setbacks such as the Covid pandemic when many firms cancelled or paused their payouts.

Method 4: Selling options to top up dividends 

Enhanced income funds (also known as ‘income maximiser’ funds) have a way to boost their dividend power. They might generate a 4% or 5% yield from their underlying portfolio but often pay even more to investors. 

They sell call options on stocks held in the portfolio to generate additional income. These options are contracts that give the buyer the right, but not the obligation, to buy the underlying asset at a specific price on or before a certain date.

For example, an investment bank buys an option on Company X from an enhanced income fund for a fee. This entitles the investment bank to any rise in the price of the underlying share above a certain level over a set period, typically three months. The enhanced income fund uses the option fee to top up its dividends, but in doing so it sacrifices part of the capital growth from the stock holding.

Enhanced income funds might underperform traditional equity income funds when markets are rising but potentially outperform in a falling market.

Call options can be difficult to understand and charges on enhanced income funds are often much higher than a traditional equity income fund. That means these types of funds won’t suit everyone.

Method 5: Property income

Property has long been a rich source of income, whether directly through buy to let ownership or using investment funds.

Property-focused investment trusts use tenants’ rent to fund shareholder payments. They can also make money from doing up properties and selling them, using capital gains to top up dividend payments to investors. Though it is worth noting they might prefer to redeploy capital into property acquisitions.

Other income-generating investments 

Fixed income funds can pay a regular stream of cash to investors, funded from coupons paid by a portfolio of corporate or government bonds.

Multi-asset funds are a one-stop-shop for investors seeking instant diversification. They will hold a mixture of investments, typically income-paying shares, bonds, and property assets.

Alternatively, investors can always sell chunks of their investments and use that money to generate an income – we will explore the pros and cons of this strategy in a future article.