Go international with Henderson International Income

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published 12 November 2024

If you’re hunting for income, the UK stock market is one of the best places to look. However, investors shouldn’t allow the market’s attractive dividend yields to distract them from the need for international diversification. The UK is a tiny part of the global economy and makes up less than 5% of total global equity capitalisation. And going global doesn’t have to mean sacrificing income.

A number of global equity investment trusts offer yields matching or exceeding the yield of UK equities. The average yield of trusts in the AIC Global Equity Income sector is 3.6% on a trailing twelve-month basis (TTM), compared with 3.55% for the FTSE 100.

The largest trust in the sector, with £2.9bn of assets and a TTM yield of 3.4% is JPMorgan Global Growth & Income (LSE: JGGI). It is followed by Murray International (LSE: MYI) at £1.7bn of assets and a yield of 4.6%; Scottish American (LSE: SAIN) at £1.1bn and a yield of 2.8%; Henderson International Income (LSE: HINT) at £385m and a yield of 4.7%; and STS Global Income and Growth (LSE: STS) at £309m and a yield of 2.9%.

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Why Henderson International Income has the highest yield

The highest yield here is from Henderson International Income, which has built and maintained its lead by using all the tools available to investment trusts. The company’s board has emphasised its commitment to a progressive dividend policy. Although the portfolio’s income fell by 7.5% in the last financial year, it was able to increase its dividend yield to 3.8% by drawing on its revenue reserve – surplus income retained in previous years to help it support payments in difficult years.

Trusts can also pay out income from realised capital gains rather than just relying on portfolio dividend income to maintain and grow dividends throughout the market cycle. JPMorgan Global Growth & Income leans heavily on the capital growth of its portfolio to fund its dividend and this strategy has paid off handsomely. The trust is one of the best-performing in the AIC sector, having returned around 15% annualised over the past five years on a total return basis.

Henderson International Income has taken a lesson from this. The company’s board recently updated its mandate to allow the manager to select stocks based on their growth and income potential, reducing the need for each holding to contribute to returns on an income basis. This change could lead to a meaningful adjustment in its returns in the future.

The trust also uses other trading strategies to generate additional income. These include investing in corporate bonds and writing covered call options, which have historically accounted for 4%-10% of the company’s cash available for distribution in dividends.

Trading at a discount

Back in 2019, Henderson International Income traded at a small premium to net asset value (NAV), but the discount has blown out since mid-2023. It hit a record of 15% towards the end of 2023, although it is back to around 10% at present.

This discount, combined with the sector-leading yield, makes the trust look attractive at current levels. The underlying portfolio is trading at a forward price-to-earnings (p/e) of 14.7, according to broker Panmure Liberum. However, after factoring in the current NAV discount, analysts reckon the valuation falls to 13.3. The trust’s holdings have the potential to deliver earnings growth of 10.4% for the year ahead, based on analysts’ consensus forecasts.

Most of the growth will come from its allocation to tech, which has grown from around 7.5% of the portfolio in 2023 to 20% at the end of its 2024 fiscal year, a move enabled by the change in investment strategy. The largest holding in the portfolio is now Microsoft, and the US has the largest country weighting, at just over 37%. France is second at 13%, helped by a position of 3.8% in pharma group Sanofi.

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Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.

Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.