High Income fund by name, and by nature

ALTHOUGH it’s still not quite halfway through its financial year, investment trust Henderson High Income is valiantly battling to live up to its name.

Last week, the trust announced the payment of a 2.475p dividend per share for the second quarter of this year – 2.1 per cent higher than 12 months ago, and replicating the payment made three months earlier.

Furthermore, the trust’s board said it intended to make the same dividend payments for both the third and final quarters of its financial year. It means a dividend for the full year of 9.9p a share, a 1p increase on last year and an annual income equivalent to more than 7 per cent – a comfort blanket for shareholders.

‘Some good news for income investors,’ says David Smith, manager of the trust. The comment was made the same day (last Thursday) that telecoms giant BT took an axe to its dividend.

The trust’s ability to increase its total dividend this year is partly based on the fact that the £157million fund has ten months or so of income held in reserve, which can be drawn on to support future dividend payouts.

Also, 18 per cent of the trust’s portfolio is invested in bonds issued by companies that continue to pay an attractive income – quality, financially robust UK businesses such as Tesco and Aviva and, further afield, US brewer Anheuser-Busch and US telecoms giant Charter Communications. ‘Obviously, the income from these bonds is proving more resilient than the dividends from some equities we own,’ says Smith.

Another leg of Smith’s defensive income shield is a smattering of holdings in overseas equities – the likes of French drugs company Sanofi, Swiss healthcare company Roche, German insurer Munich Re and US drinks manufacturer Coca-Cola.

‘They’re all stable businesses and help diversify our sources of dividend,’ he says.

As expected, High Income’s portfolio also comprises some of the UK’s most dividend-resilient companies including tobacco giant BAT, consumer goods producer Unilever and Tesco. It still has Shell – a top ten holding – although the company’s decision to cut its dividend means Smith is likely to trim the position in the coming months.

Stocks that Smith has recently disposed of include International Airlines Group, owner of British Airways. ‘I sold out in January after making a decent profit,’ he says. ‘At the time, I felt coronavirus could adversely impact the airline industry, but I never thought its scale would be so big.’

Other disposals include asset manager Jupiter and house builder Vistry – previously known as Bovis. Smith believes Schroders and Persimmon and Bellway are better alternatives in their respective sectors. Among other key holdings are Whitbread – owner of Premier Inn Hotels – and engineer Bodycote, although he says these will only come into their own once the economy starts to come out of lockdown.

The overall performance numbers for High Income are a little underwhelming, not helped by £50million of borrowings used to increase the trust’s exposure to markets and costing in excess of 2.5 per cent in annual interest charges. Smith is keen to reduce this debt.

Over the past three months, the trust’s shares have fallen by more than a fifth although they have bounced back in the past month.

Smith acknowledges the future is fraught with uncertainty. ‘It will be a slow grind as the economy comes out of lockdown and the stock market will be prone to bouts of volatility, especially if coronavirus flares up again. All I can do as the trust’s investment manager is be cautious and underpin the portfolio with defensive holdings.’ The trust’s ongoing annual charge is 0.8 per cent.