Highland Income Fund's $0.0385 Dividend: A High-Yield Play With Substantial Risks?
124min read The highland Opportunities and Income Fund (HFRO) has maintained its monthly dividend at $0.0385 per share since January 2024, a strategic adjustment that reflects a broader shift in its investment approach. While this decision has preserved a trailing 12-month dividend yield of 9.06%—far above the U.S. market’s bottom 25% dividend yield of 0.667%—it also underscores the fund’s pivot toward higher-risk, growth-oriented assets. Investors weighing HFRO’s appeal must balance its high yield against its exposure to illiquid investments, credit risk, and structural challenges like a persistent discount to net asset value (NAV).
A Dividend Cut Rooted in Strategic Shifts
HFRO’s decision to reduce its dividend from $0.077 to $0.0385 in early 2024 was not arbitrary. The fund, rebranded as the Highland Opportunities and Income Fund in June 2023, shifted its focus from high-yield senior loans to a portfolio emphasizing real estate, private equity, and structured products. These assets generate capital gains and return-of-capital distributions rather than steady income, necessitating a lower payout to align with cash flows.
The reduced distribution has stabilized HFRO’s payout, but its long-term dividend growth remains negative: a -12.94% decline over five years. This reflects the trade-off between income and growth, as the fund reinvests capital into illiquid, long-term holdings.
High Yield, High Risk
HFRO’s 9.06% TTM yield is compelling, but it comes with caveats. First, the fund’s monthly dividend includes return of capital (ROC), which reduces shareholders’ cost basis and may increase future capital gains taxes. Second, its portfolio carries significant credit risk: nearly a quarter of assets are in real estate, while the remainder includes high-yield corporate bonds and private equity—sectors vulnerable to economic downturns and liquidity crunches.
Furthermore, HFRO’s shares trade at a discount to its NAV ($5.10 vs. a NAV of ~$5.80 as of May 2025). This discount, a common issue among closed-end funds, reflects investor skepticism about HFRO’s ability to liquidate its illiquid assets at favorable prices. Management has attempted to narrow the gap via share repurchases and the issuance of preferred shares, but results remain mixed.
Recent Moves and Ongoing Challenges
In early 2025, HFRO completed an exchange offer converting common shares into 5.375% Series B Preferred Shares. These preferred securities, rated BBB+ by Egan-Jones, began paying dividends quarterly starting March 31, 2025, offering a more predictable income stream to preferred shareholders. However, this move does little to address the common shares’ discount or the fund’s reliance on volatile assets.
Legal risks loom as well. HFRO’s adviser, NexPoint Asset Management, faces unresolved litigation, including a case against Credit Suisse that could impact investor confidence, though no material harm to HFRO’s NAV has yet emerged.
Data-Driven Analysis: Is HFRO Worth the Risk?
- Yield vs. Risk: HFRO’s 9.06% yield outperforms most fixed-income alternatives but requires accepting illiquidity and credit risk.
- Performance: Over five years, HFRO’s share price has underperformed the S&P 500, down 12.94% versus the index’s gains.
- Liquidity Concerns: 25% of assets in real estate and private equity limit HFRO’s ability to quickly adjust its portfolio, raising red flags for investors seeking flexibility.
Conclusion: A High-Reward, High-Risk Proposition
HFRO’s $0.0385 dividend offers a compelling yield for income investors willing to tolerate significant risk. The fund’s focus on real estate and private equity could deliver long-term growth, especially in a stable or improving economy. However, its structural challenges—including a persistent NAV discount, exposure to illiquid assets, and management’s legal woes—make it a speculative play.
Investors should proceed with caution. Those seeking steady income may find better options in more liquid, lower-yielding funds. For aggressive investors, HFRO’s yield and growth potential could justify the risk—if they can stomach volatility and the possibility of prolonged discounts to NAV.
In short, HFRO’s dividend is a high-wire act: rewarding in good times, but perilous if liquidity tightens or credit markets sour.
This analysis synthesizes HFRO’s dividend history, strategic shifts, and underlying risks to guide investors in evaluating its suitability within a diversified portfolio.
