Total Return, Not Just Yield

Fund spending from total return — income plus capital growth — not from yield alone. (The endowment total-return approach, championed by David Swensen.)

Many people want their retirement pot to "pay them an income" — dividends and interest they can spend without ever touching the capital. It feels safe. Often it is not.

Chasing yield narrows your choices. To lift the income a portfolio pays out, you tilt towards higher-yielding assets — more of one kind of share, riskier bonds, property concentrated in one place. The pot becomes less diversified at exactly the moment it should be more.

The endowment answer is to spend from total return: the income the portfolio pays plus the growth in its capital value. You hold the best-diversified mix you can, then sell a small slice when you need cash. Over a long horizon, most of a share portfolio's return has come from capital growth, not the dividend — so spending only the yield either forces you to under-spend or pushes you to reach for risk.

Illustrative example: where the return comes from

Of a diversified equity portfolio's long-run return, the dividend has usually been the smaller part and capital growth the larger. The exact split varies, but the lesson holds: judge the portfolio by its total return, and let the spending rule — not the size of the dividend — decide what you draw. The figures are illustrative.

Total-return thinking frees you to own the right portfolio and spend from it sensibly, rather than letting the hunt for yield quietly design the portfolio for you.