Courtiers Wealth Management
Courtiers Wealth Management

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Dividends are not the only option

4 Apr 2022

Dividends paid by companies to their shareholders are the most obvious way to generate an income from a portfolio of shares, but they are not the only option. By selling some of your shares, not only might you generate more proceeds than you would from dividends, but you could also see the value of your capital grow too.

The ‘total returns’ approach, as it is called, is based on the idea that rather than relying on dividends for income, it is equally possible and often desirable to generate income by selling shares. For one thing, dividends can be volatile, with evidence for this as recently as 2020 when pay-outs were slashed compared to 2019. Shares that don’t pay a dividend avoid this, although that said of course, capital growth is not something that can ever be guaranteed. Many people will also be sitting on gains made as a result of the recovery of stock markets following sharp falls during the early part of 2020.

The tax system

One of the factors that makes generating cash from selling shares attractive is the tax system, with many regarding the Capital Gains Tax (CGT) regime in particular as relatively generous. The government’s recent decision to avoid making significant changes to CGT, alongside the 1.25 percentage point rise in tax on income from dividends that comes into effect on 6 April has only strengthened this view.

Take the example of an investor, who takes the ‘natural yield’ of 3% a year from their £200,000 portfolio of shares held outside an ISA tax-wrapper, meaning that income and capital gains are not tax-exempt. With the Dividend Allowance set at £2,000 and April’s change to the tax rate, a higher rate taxpayer will be faced with a tax bill of £1,350.

Rather than taking the £6,000 (3% of £200,000) in dividends and facing a tax bill, by following a ‘total returns’ approach and selling £6,000 worth of their shares, and then making use of their Capital Gains Tax (CGT) Allowance this investor could protect their wealth against a Dividend Tax bill.

Assuming an investor is sitting on a capital gain of £25,000, by utilising their £12,300 CGT Allowance, they could sell £12,300/£25,000 or 49.2% of their £200,000 portfolio i.e., £98,400 before they are liable for CGT. This is far in excess of the £6,000 worth of assets they actually sell.


Here’s where the ‘total returns’ bit comes in. In addition to saving £1,350 in tax, as long as growth in the value of this investor’s remaining shares exceeds the amount they withdraw from their capital by selling shares, the overall value of their shares (their capital) will increase.

This will depend on the performance of their existing shares, and of course, there are no guarantees.

Where the value of an investor’s remaining shares rises only slowly, and particularly when it is declining, selling shares to generate income could potentially result in a fall in the value of a person’s capital.

Selling shares when the value of the remaining portfolio of shares is falling is particularly damaging, as the withdrawal of capital represents a greater proportion of the capital as a whole – in other words, in percentage terms the fall is greater. Furthermore, the return on remaining investments needs to grow at a higher rate than previously to meet an investor’s existing financial objectives. In falling markets, one possible option is to draw on cash reserves and then to revert to selling shares once markets have recovered.

Although inevitably there will be times when markets fall and the value of an individual’s portfolio of shares declines, having a long-time horizon should improve the chances of the ‘total returns’ approach being successful. This should allow investors to ride out short-term capital losses in the expectation of long-term capital growth that history tells us equities have delivered. Although, of course, past performance does not guarantee future returns.

For those people who would rather avoid the hassle of selling their investments and the paperwork involved (where applicable) in reporting disposals of assets to HMRC, it may be worth considering moving their investments into collective investments, such as Courtiers Funds, where dividends are not paid directly to the investor but are distributed to the fund manager.


Adopting a ‘total returns’ approach may also involve a rebalancing of existing portfolios. For those who hold shares predominantly for the dividend income they generate, this could entail switching to some growth stocks, or to assets that generate a mixture of income and capital growth. It doesn’t have to be one or the other. Having a better mix of stocks will also help to diversify a portfolio.


With many people sitting on substantial capital gains on their shares, the rise in taxation on dividend income and a relatively generous CGT regime, now might be a good time to consider the ‘total returns’ approach.

If you would like further information, please contact your Client Adviser.

Important information

The views expressed by Courtiers in this summary are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this article. Investors are recommended to take independent professional advice before effecting transactions and the prices of stocks, shares and funds, and the income from them can fall. Past performance is not a guide to future returns.

Tax treatment depends on individual circumstances and may be subject to change in future.

We do not endorse or accept responsibility for website content on any websites other than those operated by Courtiers, which may be accessible via links in this article.

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