Outperformance and dividend growth over the past decade: Henderson High Income

HHI’s blend of equities and bonds has supported outperformance and dividend growth over the past decade…by Josef Licsauer

Overview

David Smith has led Henderson High Income (HHI) since July 2015, employing a disciplined, quality and value-conscious approach to income investing. By blending equities and bonds, his strategy aims to deliver dependable, growing income alongside capital growth potential.

In the equity book, David targets companies with strong business models, solid balance sheets, and resilient earnings, prioritising those with steady, consistent dividend growth over unsustainably high yields. Over the past 12 months, several Portfolio changes reflect David’s positive view on UK equities. On valuation grounds, large-cap additions include Reckitt Benckiser and Aviva, both benefitting from strategic refocussing and restructuring efforts. Further down the market-cap scale, David has found compelling opportunities, adding Dunelm and Chemring—both cash-generative, with strong market positions and attractive dividend growth potential.

Whilst many UK equity income trusts focus solely on dividends from equities, HHI’s ability to allocate up to 20% of its portfolio to bonds helps enhance its yield, smooth income streams, and dampen overall portfolio volatility. Managed in collaboration with Janus Henderson’s fixed-income team, this allocation has remained relatively stable over time and is funded primarily by structural Gearing.

This setup helps further reduce income volatility and supports Dividend stability, whilst also providing David greater flexibility to explore lower-yielding opportunities with greater growth potential, unconstrained by strict income requirements. Bonds currently account for 13% of NAV, with the allocation adjusted to reflect the team’s views on credit markets, but despite optimism, David maintains an overweight equity position, given the greater value he sees in UK stocks.

Additionally, HHI completed its merger with Henderson Diversified Income (HDIV) in January 2024, adding £72m to its total assets, which stood at approximately £242m as of December 2023. Mergers often bring increased secondary market liquidity, a stronger marketing presence, and greater appeal to a broader range of investors—factors that could, over time, help narrow its wider-than-average discount.

Analyst’s View

 
The UK is often dismissed as a sluggish market, especially when compared to the US with its high-flying Magnificent Seven stocks. But this view overlooks a vital point: some of the more traditional UK companies have outperformed the market darlings over the last three years, to 12/03/2025. Companies like NatWest and Imperial Brands have returned 96.7% and 72.9%, respectively, outpacing five out of the seven Magnificent stocks, yet still trade at historically low valuations.

For investors seeking to tap into this overlooked potential, we think HHI offers a genuinely differentiated strategy. We think the approach to income generation, combining high-quality equities with a carefully managed allocation to bonds, underpins the trust’s consistent dividend growth, helps diversify the portfolio’s income streams, improves income stability, and supports an above-market yield—key attractions for income-focussed investors. Whilst bonds carry credit risk, the fixed-income team’s focus on high-quality credits and defensive businesses helps mitigate this.

Over the past 12 months, HHI has outpaced its benchmark (an 80%/20% equity-bond blend) by 2.8 percentage points, driven by strong stock selection—an impressive feat given tough market conditions. However, it’s worth bearing in mind that HHI may lag pure equity-only strategies in fast rising markets, given its bond exposure (see Performance).

Overall, we think HHI’s income flexibility allows it to diversify beyond the dominant UK dividend payers, distinguishing it from more conventional UK income strategies. With the UK’s superior yields, making it a natural overweight in income portfolios, this could be a valuable diversifier for income-focussed investors. Additionally, HHI trades on a much wider-than-average Discount – a disconnect, in our view. For investors seeking a resilient, high-income strategy with a disciplined approach to income sustainability and diversification, this could be an attractive entry point.

Bull

• Differentiated investment process combines equities and bonds to deliver a mix of high, sustainable and growing income, alongside capital growth
• Merger with HDIV has increased liquidity and enhanced asset base, lowering costs and broadening appeal
• Unique approach to gearing helps boost income and capital growth, alongside reducing volatility in the portfolio

Bear

• Allocation to bonds may see the trust struggle to keep pace with a strongly rising market, relative to a pure equity strategy
• Investor sentiment to UK remains clouded, likely due to macro concerns
• Whilst the approach to gearing helps dampen some volatility through bond exposure, it will still magnify losses in down markets

See the full research on HHI here >

_Disclaimer

_{Disclosure – Non-Independent Marketing Communication}

_{This is a non-independent marketing communication commissioned by Henderson High Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}