Create your own dividends as well as taking natural yield

"My aim is to top up a rather small income with at least £18,000 a year from my portfolio of about £635,000, so the average yield overall should be around 3 per cent," says Jane. "I prefer to take the natural yield if possible, and although capital growth is not my prime consideration it would be good to have some, as the last few years of life may require a withdrawal of capital.

"I used to have more fixed-interest investments, but sold some of them recently - I have never been very fond of this asset as I like my income to grow in line with inflation.

"When I overhauled my portfolio a few years back I aimed to have: 10 per cent bonds; 30 per cent UK shares with a core of blue-chips, and mid- and small-cap funds making up the balance; 20 per cent overseas income; 10 per cent global growth; 10 per cent infrastructure; 10 per cent property and 10 per cent cash.

"I never quite got there, and having sold the fixed interest and - maybe unwisely - other things doing really badly last year which have now gone back up, I have too much cash. I need to put this to work as I am now short on income, but income-producing vehicles are rather expensive.

"I would like to replace the individual shares with investment trusts and have a portfolio similar to one run by Investors Chronicle columnist John Baron. However, it could be difficult to sell them tax-efficiently as I have made substantial capital gains on them.

"Also the top 10 shares in most income investment trusts and open-ended funds seem very similar. I usually seem to hold about five of the shares that appear in investment trust top 10 holdings, so perhaps I should just cut back a bit on my individual share holdings and add others to create a better spread?

"I am not bad at buying shares, but hopeless when it comes to selling at the right time. I would be a lot richer now if, with a few notable exceptions, I had never sold anything but rather tidied up and rebalanced occasionally.

"I inherited the last five fund holdings from my husband and they are held with Hargreaves Lansdown rather than Alliance Trust Savings, where I hold the rest of my investments. Should I transfer them to Alliance Trust Savings to forego the 0.45 per cent annual management charge?"

Jane's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

Your aspirations for this portfolio are commendably modest: an income of 3 per cent should be achievable.

You say that income-producing investments are expensive, but there are two answers to this. Try to overcome your preference for natural yield. Strictly speaking, what matters is total return - you can create your own dividends by selling shares. And it often makes sense to do so. You have an annual capital gains tax (CGT) allowance of £11,100, so why not use this rather than take taxed income? (And investments held within an Isa do not incur CGT when sold).

You say you're hopeless when it comes to selling at the right time. Don't beat yourself up about this. Nobody consistently gets out at the top. You might, however, be able to improve this by following a simple rule: sell when a price drops below its 200-day moving average. You can easily get this data from, for example, Yahoo Finance. Doing this will not get you out at the peak. But it will protect you from a long bear market.

There is, though, another possibility: defensive stocks. Many of these are on decent yields, and history tells us that they beat the market, on average, over the long run despite having low risk. One reason for this is that investors under-rate the importance of what Warren Buffett calls "economic moats" - attributes such as brand power or high capital requirements that protect companies from competition.

You own plenty of these - not just stocks such as British American Tobacco (BATS), National Grid (NG.) and Diageo (DGE), but also JO Hambro UK Equity Income Fund (GB00B8FCHK57). Holding these meets your requirements of a nice natural yield and the possibility of capital growth.

David Liddell, chief executive of IpsoFacto Investor, says:

The total income from investments in this portfolio is over £16,500 already, according to our calculations - a yield of around 3 per cent on the non-cash element and 2.6 per cent on the total value - excluding any cash on interest.

So a few tweaks - changing the fund share classes that are accumulation, for example, with JO Hambro UK Equity Income and Unicorn UK Income (GB00B9XQFY62), to the income share class, would pretty much do the job of getting your annual income up to £18,000. The income objective can be met without really changing the investments.

We largely agree with your aversion to fixed interest at the moment, but you may want to reconsider if ten-year gilt yields go up to around 3 per cent.

There is no real need to invest your cash to achieve your income objective. While holding cash can be painful with interest rates so low and inflation potentially on the rise, in these uncertain times we wouldn't rush to reinvest it. Holding some cash is sensible and, in the absence of fixed interest, acts as some sort of hedge against the rest of your equity-heavy portfolio.

If you do need to invest it to enhance your income, try to do it gradually over a period of time, so you get some benefit from pound-cost averaging.

As regards Hargreaves Lansdown versus Alliance Trust Savings, on non-Isa investments you should make a reasonable saving by transferring. However this might not be practical if it incurs CGT, and if your investments are all investment trusts or listed entities there is no annual management charge for holding them on Hargreaves Lansdown.

Rebecca Taylor, managing director of Aurea Financial Planning, says:

While you have a desire to take naturally produced yield, this doesn't make sense when there is an annual £11,100 capital gains tax allowance. And yield isn't overly reliable when the underlying values are fluctuating.

There is no need to pay tax on receiving £18,000 income from this portfolio. As there is already a significant amount of capital gain, I suggest taking a gain each year from the individual shares up to this allowance.

Additional income will be produced from the shares' dividends and the income-producing funds. If required, withdrawals can be made from your Isa portfolio to make up any difference.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Good quality bonds have the virtue of hedging against some equity risks: they should rise in price if investors' appetite for risk or expectations for global growth fall. But they carry their own risks: for example, they could do badly if the world economy beats expectations, or fall at the same time as equities fall if investors' preferences for liquid assets increase. So it's reasonable to have a low weighting to bonds.

In the absence of bonds, however, you might need some safe assets. And a cash weighting of under 20 per cent doesn't seem to me to be excessive. It's consistent with your portfolio delivering a 3 per cent yield, if the rest of your assets yield as much as the FTSE All-Share index.

Also, there is a significant chance of the market falling: I'd put it at around one-in-four over the next 12 months. Cash helps protect you from this. A 1 to 2 per cent return may seem pathetic now, but it'll look good if equities fall 10 per cent. What matters is your portfolio as a whole: a lack of income from cash is tolerable if you can get it from your other assets.

But I am concerned that you might be overdiversifying. This matters because in holding so many assets you have something like an index tracker fund, albeit with perhaps a defensive bias. While this is a good thing, it comes at a price: you don't have the low fees that a tracker gives you. I'd consider cleaning it up not just by selling your smaller holdings, but by getting rid of some higher-charging funds. When deciding which to remove, consider what other than fees the fund is adding to your portfolio.

David Liddell says:

It would be sensible to reduce some of the individual equity holdings in favour of investment trusts. Our other main observation is that the non-UK exposure, ignoring the underlying global exposure in some of the London-listed individual equities, is only between 25 per cent and 30 per cent, so could be increased a little.

With the aim of growing income over time, we would suggest selling down some of the lower-yielding UK equities, for example Compass (CPG), Sage (SGE) and WPP (WPP). But make sure you don't exceed the annual CGT allowance, which is currently £11,100 (with sales of holdings outside your Isa), so if necessary stagger the sales over different tax years. The next tax year starts on 6 April 2017.

But bear in mind that if your Sky (SKY) shares are standing at a gain this may be realised if Murdoch's Fox bid goes through.

Reinvest in investment trusts such as Temple Bar (TMPL) and Lowland Investment Company (LWI), which should give you slightly different underlying exposure to that which you already have while also increasing the income. For global exposure, JPMorgan Global Growth & Income (JPGI) offers a different approach with a good yield.

Ideally, you would reinvest as much as you can into new Isas, for which the annual allowance rises to £20,000 from 6 April. This will not only free you from any CGT restriction on future transactions, but you also don't suffer tax on dividend income.

We estimate your current taxable dividend non-Isa income to be approximately £6,500. This won't be a problem if your personal allowance of £11,000 for 2016-17 covers at least £1,500 of this, ie excess over your annual tax-free dividend allowance of £5,000 and any other income.

Rebecca Taylor says:

There are two main issues that stand out here: the lack of portfolio diversification, with an extremely high holding in large-cap UK stocks, and a desire to chase yield - both of which have resulted in an inefficient portfolio. This is not the most reliable way to provide a substitute income and carries a high level of investment risk. As you are looking for only a relatively modest income from a sizeable holding all you need to do is look at how to achieve this in the most efficient way.

Within the constraints of CGT, I would restructure this portfolio to diversify the holdings in terms of style, size and geography. This will reduce risk, and mean you don't overly rely on any particular market or sector as is the case now.

Your fund holdings are expensive. A portfolio with a far broader asset allocation in which assets would work together in different cycles could be achieved at very low cost by using passive funds.

A portfolio that overall needs to produce a 3 per cent yield would be highly concentrated, and unlikely to grow and increase to offset inflation. So to provide the income required, I would feel confident about a well-rounded portfolio, even with a lower risk level than the current portfolio, achieving this via capital growth. You would create an income by taking capital gains, but be likely to maintain or even grow the overall portfolio value, and this would also help inflation-proof the income.

An example asset allocation could be as follows:

Rebecca Taylor's suggested asset allocation

Total growth assets 73 per cent; Total defensive assets 27 per cent