Growth and income are not opposing investment goals. Together, they can support strong long-term returns if investors know where to find the right opportunities, says Ryan Lightfoot-Aminoff, investment trust research analyst at Kepler Partners.
For most people investing in the stock market, the two central objectives are straightforward: building the value of their savings and generating an income from their investments.
Those aims do not have to be separate. Indeed, an increasing number of investment trusts are designed to offer shareholders both the potential for capital growth and an attractive income.
The structure of an investment trust gives its boards useful flexibility in pursuing both objectives. During stronger years, they can retain a portion of the income produced by the portfolio and use it to support dividend payments when market conditions become more difficult.
Many trusts have also introduced what is known as an enhanced dividend policy. This allows them to use a modest share of investment profits to help fund a set level of income.
Consequently, a number of investment trusts now combine appealing yields with the prospect of substantial capital gains, even when they invest in asset classes not traditionally associated with income.
Growth and income can work together to support strong long-term investment returns
How to invest for income in unexpected places
International Biotechnology Trust (IBT) is one example from a less conventional income-producing asset class. Biotechnology is generally viewed as a growth investment because it includes companies working at the forefront of medical innovation, from new medicines to advanced treatments.
The sector can deliver sharply contrasting results. When a company successfully completes clinical trials, its shares may surge in anticipation of the future revenue the treatment could generate. If trials fail, however, the share price can suffer a severe fall and may even become worthless.
This highly binary return profile makes biotechnology one of the riskier investment areas. With companies’ cash flows difficult to predict, dividend payments are also relatively rare.
Ailsa Craig of International Biotechnology Trust, which targets growth while also paying a dividend
IBT’s managers, Ailsa Craig and Marek Poszepczynski, have addressed these challenges with a sophisticated and risk-conscious investment approach. It has helped them identify potential winners while seeking to avoid weaker parts of the market.
The strategy has produced strong results. IBT’s net asset value rose by approximately 86 per cent over the past five years, compared with about 41 per cent for its benchmark, the Nasdaq Biotechnology Index.
Alongside those capital gains, the trust uses its investment profits to provide a predetermined income. The payment is set at 4 per cent of NAV on the final working day of its financial year and is distributed in two equal instalments during the following financial year.
IBT shareholders therefore gain exposure to biotechnology’s significant growth potential as well as an income stream derived from a very different group of companies than those typically found in an income portfolio. That can bring valuable diversification benefits.
The small companies with big potential… and dividends
Montanaro UK Smaller Companies (MTU) provides another example. The trust offers a yield of around 6 per cent despite investing in a growth-oriented segment of the UK market, focused on companies at the smaller end of the market-capitalisation spectrum.
Smaller businesses are generally less mature than their large-cap counterparts. They often reinvest more of their available cash in order to expand the business and pursue future growth.
For that reason, small-cap investments have historically offered relatively limited dividend potential.
That picture has changed in the near term, helped by resilient underlying performance among many UK smaller companies and low valuations resulting from weak investor sentiment.
As a result, the income being generated by small-cap companies is currently higher than its historical average.
In addition, MTU uses an enhanced dividend strategy to top up the income it generates, meaning investors can not only capture knock-down valuations in UK small caps and potentially benefit from a long-overdue recovery, but also generate a very attractive income along the way.
It’s a kind of magic: Publisher Bloomsbury is one of Montanaro UK Smaller Companies’ holdings and pays out a dividend
How to invest in the US… and pick up income
The US is often one of the first markets investors turn to when looking for growth, having led the way globally for much of the past two decades. However, the country has less of a dividend culture.
Firms prefer to return additional cash to shareholders through buybacks rather than income.
Fortunately, the approach of BlackRock American Income (BRAI) has several factors that help redress this. Firstly, managers Travis Cooke and Muzo Kayacan target value stocks, typically those trading at depressed valuations and therefore offering higher yields.
This approach, adopted in April 2025, has already led to returns beating both the S&P 500 Index and the trust’s own benchmark. In addition, the trust has an enhanced dividend policy that pays 1.5 per cent of NAV to investors once per quarter, meaning an annualised yield of around 6 per cent, although this figure will vary as the trust’s value moves throughout the year.
As such, BRAI offers exposure to the growth potential of the wider US economy whilst diversifying from the dominant tech sector, while investors can also generate significant income due to the trust’s differentiated approach.
The trust packing a year’s dividends in reserve
Not all investment trusts offering both growth potential and attractive incomes have resorted to using an enhanced dividend approach.
Murray International (MYI), for example, has used an investment trust’s ability to hold back income in more prosperous times to build an impressive reserve, equivalent to over a year’s dividends, which can be used should the trust experience weaker income generation.
This means MYI is well placed to build on its 21 consecutive years of dividend growth, and with the current yield of around 3.6 per cent, it is more than double wider global markets (as measured by the MSCI World Index).
Despite this better income picture and impressive dividend growth track record, managers Martin Connaghan and Samantha Fitzpatrick have also generated impressive capital growth, with a NAV total return of 90 per cent over five years, above the global markets 74 per cent.
As such, we believe the trust is well placed to continue to deliver both growth and income for investors going forward.
How to back unlisted companies and get income
One further example that demonstrates the flexibility of the investment trust structure is CT Private Equity (CTPE).
As the name suggests, the trust invests in private companies before they join listed, public markets, with a focus on lower-mid market European companies.
The trust is likely to have a very different return profile to most other trusts, and even to private equity peers which tend to focus on US-based companies.
Furthermore, as these companies are private, difficult to trade and usually in the growth phase of their life cycle, income opportunities are limited.
However, CTPE has been paying a dividend for many years and has followed a set formula since 2012. This pays out the equivalent of 4 per cent of NAV per annum, although the amount will be tweaked to ensure the dividend does not fall from year to year.
This means the trust now has 14 consecutive years of dividend growth, the longest amongst all private equity trusts, as well as yielding over 6 per cent despite the asset class not being well-known for income.
