Why we focus on total returns

Our main focus as your financial adviser is ensuring you make wise, informed decisions to reach and maintain financial independence. For most people, this means a long, independent retirement and leaving a legacy to those they love.

Naturally, a significant part of this process is helping you to invest wisely. The long-term success of our relationship depends on mutual respect and an alignment of philosophies.

Our preference is for a “total return” approach rather than a “dividend yield” strategy.

Any investment we consider should be measured by its likelihood to defend and grow your purchasing power.

We know that the most significant factor working against us in this aim is inflation, the (mostly) slow but steady increase in prices. Inflation erodes the purchasing power of our money.

A well-chosen investment strategy should therefore provide a return (over the long-term) that exceeds both inflation and an additional hurdle that will allow you to grow your wealth to the point that it can provide you with an income you can't outlive.

Our recommended portfolio will likely contain a significant allocation to global stocks - ownership in the great companies of the world. This asset class has a long history of providing inflation-beating returns.

The returns provided by the world's great companies consist of two elements: dividends and capital growth.

Dividends are profits that company management chooses to distribute to shareholders after they've allocated capital to growth projects. Wise investors use these dividends to purchase more fund units, leading to higher dividends in the future.

Capital growth results from other investors being willing to buy shares in the company for higher and higher values over time. They do this because the company has likely proved its ability to grow profits over time, making the company more valuable. As an investor, you benefit from this by making your fund units more valuable.

The dividend return (or yield) plus the capital growth gives us a “total return” on our investment. This is the return we are concerned about.

In our planning together, we are able to advise what investment return you require over the long term to achieve and maintain financial independence. When we calculate this target, we are not concerned about what the return consists of.

A portion will be from dividends; the bulk will be from capital growth. We are indifferent because the income you will draw in 20 years (as an example) will have a Pound value. Neither you nor we will care whether it resulted from dividends or capital growth.

Being agnostic between the elements of return allows us to focus on structuring a diversified portfolio exposed to appropriate risks. We avoid becoming over-exposed to industries with a history of higher dividends and under-exposed to sectors with higher future growth prospects. Companies that operate in fast-growing sectors often re-invest all profits into the business, leaving nothing for dividends.

With less of a focus on dividend shares, we also improve the tax efficiency of your withdrawals as capital gains are taxed at a lower rate than income (currently).

Our approach does not mean that we avoid dividends shares; we just don’t go looking for them at the expense of the other factors explained above. We have more control over the size and timing of your withdrawals, not being dictated to by the makeup of portfolio returns. The focus is on your life and your needs.

While some advisers focus on a dividend yield approach (we're sure they have their reasons), it does not make sense to us. Focusing on a portfolio's total return is what seems sensible to us and is the way we manage all client money.

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