10 funds to produce a £10,000 income in 2026

The UK stock market was one of the world’s top performers in 2025, with the FTSE 100’s return of 25.8% comfortably outstripping returns across the pond, with the S&P 500 delivering 9.3% in sterling terms.

As a result, UK funds had a strong year, particularly those with a focus on generating income, with the average gain of 18.7% for the Investment Association (IA) UK Equity Income fund sector ahead of returns of 15.4% for the UK All Companies sector and 4.8% for UK Smaller Companies.

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Various FTSE 100 sectors performed well both in terms of capital growth and income generation, including financials and defence stocks. In turn, this played a big role in dividend-focused strategies outperforming.

However, while rising share prices are welcome for existing investors, they have the effect of pushing down yields. As a result, I’ve made changes to the 2026 line-up to raise the portfolio’s yield to a higher level than would otherwise have been achieved.

As ever, bear in mind that this portfolio is hypothetical and educational. The portfolio is designed to provide food for thought and demonstrate the challenges DIY investors face when building an income-producing portfolio. For more information, please see the section on ‘purpose of the portfolio’ in the final section of this feature.

How the 2025 portfolio performed

The 2025 portfolio (the article can be found here) required £235,000 for the £10,000 income challenge (a portfolio yield of 4.26%). 

The hypothetical portfolio size grew to £275,389 at the end of 2025, which represented a percentage return of 17.2%. The income generated fell slightly short, at £9,593, but this shortfall was more than mitigated by a capital gain of just over £30,000 (with the overall total return being just over £40,000). Therefore, income investors could have dipped into their capital for extra cash if necessary.

As the 12-month yield figure is used to reflect the income that’s been generated by the fund, rising share prices had the effect of reducing fund yields, which led to slightly less income being produced than expected.

Below, I share how the portfolios have fared each year since I started constructing them in 2023. While there’s no benchmark to ‘mark my homework’, I’ve listed the return of the IA’s 40-85% Mixed Investment Sector, which in common with this hypothetical portfolio contains funds holding both shares and bonds.

Source: FE Analytics. Past performance is not a guide to future performance.

How the equity funds performed

Funds should be regarded as a medium- to long-term investment rather than being judged over shorter time frames – for good or bad. However, it’s advisable to review your investments annually and consider switches if circumstances have changed.

When investing in funds, the key things to watch out for include whether the same manager is running the fund, whether they are sticking to their knitting in terms of the investment objective and style, and whether performance has soured on the back of too many poor stock selection decisions.

None of those factors applied to the 10 funds I picked for last year’s income challenge.

In terms of the best performers, the UK trio all outperformed the average UK equity income fund. Vanguard FTSE UK Equity Income Index led the way, with a gain of 31.2%.

The value-focused and actively managed Man Income delivered handsome returns, up 27%, while larger company-focused Artemis Income also outperformed peers in gaining 21.7%.

Artemis Monthly Distribution, the portfolio’s largest holding, returned a very solid 23.1%. This fund typically holds 60% in shares and 40% in bonds.

Both global equity income funds from the portfolio also outperformed the sector average return of 12.8% in 2025. Vanguard FTSE All World High Dividend Yield ETF (LSE:VHYD) returned 17.7%, while Fidelity Global Dividend was up 15.1%.

Guinness Asian Equity Income lagged its sector average return, up 12.6% versus 19%. But this is perhaps no surprise owing to the strong rising market over a short time period and given the fund’s income focus and equal-weighted approach. Over three years, it has matched the sector average return of 28.3%, but is ahead over five years, up 41.5% versus 25.6%.

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Bonds carried out their defensive duties

Bond fund returns are expected to be less exciting as their role in a portfolio is to generate income and provide defensive ballast against any unwelcome sell-offs in equity markets.

In 2025, I dialled up the portfolio’s exposure to bonds from 30% to 40%. This was due to yields being at attractive levels at the time of around 4.5% on the lowest-risk areas of the bond market such as gilts and money market funds. Moreover, the move to beef up bonds was also down to the prospect of more interest rate cuts occurring in 2025, which would have the effect of boosting bond prices.

Those interest rate cuts did materialise and while yields on the lowest-risk areas of the bond market have been declining (as a result of bond prices rising), there are plenty of opportunities further up the risk scale for bond fund managers to take advantage of.

In 2025, Jupiter Strategic Bond gained 9.8%, followed by returns of 8.4% for Royal London Global Bond Opportunities and 4.4% for Royal London Short Term Money Market fund, which aims to deliver a cash-like return.

Source: Morningstar. Past performance is not a guide to future performance.

How the 2026 line-up has changed

As mentioned in the introduction, for an investor building an income portfolio today, it is more challenging than a year ago as fund yields across the board are lower.

To address this and reduce the amount required for the £10,000 income challenge, I’ve added in two specialist funds that aim to deliver an extra chunk of income at the expense of capital growth.

Overall, the 2026 portfolio yields 4.67%. Generating £10,000 of income would require a portfolio size of £215,000. This is the lowest starting value in the period I’ve been running the portfolio and is an attempt to give the portfolio a greater bias towards income generation.  

All yield figures were sourced in late January, but bear in mind that yield figures are not static. In each case the income share class has been chosen, as this share class returns the income back to investors rather than reinvesting the income (which is what the accumulation share class does). 

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Specialist income funds explained

The specialist income funds are not for everyone and the way they invest is not as straightforward as most other funds. However, they are a way of boosting the overall yield of a portfolio, particularly when only funds can be chosen.

Schroder Income Maximiser and Fidelity Global Enhanced Income have been handed weightings of 10% and 12.5% respectively.

Both funds artificially boost their dividend yields through a special technique that involves selling derivatives to other investors.

Under this strategy, the fund manager agrees to share any future capital gains with a third party. A fee is paid for the agreement, which creates immediate, up-front income. This can be distributed to fund investors as a stream of income.

The downside is that when a fund’s holdings rise in value some of that gain goes to whoever bought the derivative. Therefore, such funds lag the pack in rising markets.

Schroder Income Maximiser’s top 10 holdings are all FTSE 100 income heavyweights. Its top 10 weightings are small in percentage terms, with top holding GSK (LSE:GSK) accounting for 3.3% of the fund and British Land (LSE:BLND), the 10th-largest position, a 2.7% position. 

Fidelity Global Enhanced Income has a very low weighting to the US (just 7.4% of the fund) and an overweight position to the UK of 20.4%. There’s one UK name in the top 10 holdings, Reckitt Benckiser (LSE:RKT), the consumer staples giant. The fund’s top three holdings are Taiwan Semiconductor (NYSE:TSM), healthcare giant Roche (SIX:ROG), and Spanish clothing firm Industria De Diseno Textil (XMAD:ITX), widely known as Inditex.

My thinking is that given that risk has been spread across various funds with different mandates, this gives the portfolio plenty of diversification in rising markets (even with the two enhanced income funds) and the bond exposure can protect capital if a stock market downturn occurs.

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Two funds taken out

Exiting the portfolio are Fidelity Global Dividend and Vanguard FTSE All World High Dividend Yield ETF. This is solely down to both fund yields being low, which makes it challenging to have a sufficiently high enough overall portfolio yield.

Fidelity Global Divided has a yield of 2.5%. If I were to choose it instead of Fidelity Global Enhanced Income and handed it the same 10% portfolio weighting it would bring the portfolio’s yield down from 4.67% to 4.34%.

Fidelity Global Divided does typically have a low yield (it was 2.4% a year ago) as the fund aims to limit downside risks by being defensively positioned. However, while I think the fund is a worthy candidate as a global equity income holding, I could no longer retain it given fund yields have fallen across the board compared to when I made my selections a year ago.

Vanguard FTSE All World High Dividend Yield ETF is now offering a yield of 2.8% compared to 3.2% a year ago. As a result, I’ve opted to remove it as part of my plan to have a higher overall portfolio yield. The exchange-traded fund follows the ups and downs of the FTSE All-World High Yield Index, which comprises more than 2,000 large and mid-cap stocks with higher-than-average dividend yields.

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Money market fund removed in favour of higher-yield option

For the bonds, one change has been made to the 2026 line-up. Royal London Short Term Money Market has been removed in favour of L&G Short Dated £ Corporate Bond Index. 

Over the past couple of years, money market funds have proved to be a solid allocation for cautious investors, or for those looking to park cash for a short time. In 2025, money market funds returned 4%-plus in sterling terms, with negligible volatility.

However, interest rate cuts mean the amount of income such funds can generate is declining. With UK interest rates standing at 3.75% at the time of publication, and the expectation of one or two cuts in 2026, this will quickly feed through into lower future returns for these funds. A year ago, Royal London Short Term Money Market had a yield of 4.8%, but it is now 3.9%.

In theory, lower rates could lead some investors to take on greater risk elsewhere in pursuit of potentially higher returns.

One route for investors with a slightly higher risk appetite might be short-dated enhanced income funds, which generally offer more attractive yields. However, the trade-off is that a bit more risk needs to be taken versus money market funds that aim to deliver a cash-like return.

One option is the L&G Short Dated £ Corporate Bond Index fund, which invests in investment-grade sterling bonds with less than five years to maturity and tracks the Markit iBoxx GBP Corporates 1-5 Index. The distribution yield is around 4.7% and the yearly fee is 0.14%.

Overall, the bond exposure is around 35%, which is slightly less than last year’s 40% weighting. This is due to handing Artemis Monthly Distribution a 15% weighting rather than a 20% weighting due to a lower fund yield (3.7%) than a year ago (4.3%).

All current yield figures sourced from Trustnet at end of January and additional check made that yields are in line with the fund firm factsheets with additional check with latest fund firm factsheets that show dividend yield figures, apart from the three stated below. Past performance is not a guide to future performance.

At a glance: how the other retained funds invest

Artemis Income

This fund aims to provide a steady and growing income along with capital growth. It has a larger company focus, which accounts for 85% of the fund. Banks are well represented, with Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) having weightings of 4.9%, while Barclays (LSE:BARC) is also in its top 10 holdings, accounting for 4.1%.

Its longstanding fund manager Adrian Frost has managed the fund since 2002, with signs of robust succession planning in place, with co-manager Nick Shenton joining in January 2013 and co-manager Andy Marsh joining in February 2018.

Man Income

The fund adopts a value-driven approach to provide a yield well in excess of the FTSE-All Share’s. Henry Dixon has managed the fund since inception in November 2013, when he joined Man GLG.

It pays a monthly income, which is rare for a UK equity income fund as most pay out quarterly or twice a year.

Vanguard FTSE UK Equity Income Index

The index this tracker fund follows – the FTSE UK Equity Income index – consists of shares “that are expected to pay dividends that generally are higher than average”. Therefore, its performance and income generation is heavily influenced by the biggest FTSE 100 dividend stocks.

It has comfortably outperformed the UK equity income sector average over one, three, five, and 10 years. As well as performance beating many fund managers, the fund generates a higher yield than the wider market at 4.2% versus around 3% for the FTSE 100 index. However, its yield is notably lower than a year ago, when it stood at 4.9%.

Guinness Asian Equity Income

An equally weighted approach to 36 stocks helps to reduce stock-specific risk. Edmund Harriss, who has managed the fund since inception in 2006, focuses on high-quality companies paying dividends and with sustainable competitive advantages, such as firms with products or services that are better than competitors.

China accounts for its biggest country weighting, at 39.7%, followed by Taiwan, which comprises 19.3%.

Artemis Monthly Distribution

The mixed-asset fund paying a monthly income typically has 60% in shares and 40% in bonds.

It is managed by four experienced specialists. Jacob de Tusch-Lec and James Davidson are responsible for managing the equity part of the portfolio, co-ordinating with Jack Holmes and David Ennett who manage the bond exposure.

The fund focuses on “attractive valuation and income characteristics, diversified beyond the ‘usual suspects’ often held by competitors”.

The strategy has a strong track record, ranking in the top quartile of the IA Mixed Investment 20-60% Shares peer group over one, three, five and 10 years.

Royal London Global Bond Opportunities

Investing in under-researched parts of the market, including unrated bonds, this fund’s  been a solid performer across multiple time periods.

It can invest across a broad spectrum of global fixed income, encompassing investment grade (those deemed “high quality”), sub-investment grade and unrated bonds, which helps to mitigate risk while providing considerable opportunities. The combined exposure to high yield and unrated bonds is considerable, sitting at just over 60%.

It is managed by the experienced duo of Rachid Semaoune and Eric Holt.

Jupiter Strategic Bond

This is a “go anywhere” fund, meaning the managers can seek out the best opportunities within the global bond universe while carefully managing downside risk.

Bonds are picked based on the managers’ view of the global economy, with them assessing how much risk it is appropriate to take, deciding which sectors and countries offer the best opportunities, and considering factors such as inflation, interest rates and economic growth.

The fund is managed by the highly experienced Ariel Bezalel since inception in June 2008, alongside Harry Richards, who has been a manager on the fund since 2019 and joined the firm in 2011. 

Purpose of the portfolio

The hypothetical portfolio aims to show DIY investors how they can build their own diversified income portfolios alongside wider research.

The funds are chosen on the basis that over the medium to long term they would be expected to grow both capital and income. However, there are no guarantees these aims will be achieved.

Moreover, it’s important to be mindful of the fact that overall total returns (capital and income combined) can decline, especially in the short term.

Bear in mind that funds must distribute all the income generated each year. Therefore, when income dries up, as it did in 2020 when the Covid-19 pandemic emerged, a dividend cut is pretty much inevitable.

Investment trusts, on the other hand, can hold back up to 15% of dividends received each year, which means they can build up a reserve to bolster payouts in leaner years.