Invesco Senior Income Trust’s $0.038 Dividend: A High-Yield Gamble or Prudent Adjustment?

The Invesco Senior Income Trust (NYSE: VVR) recently declared a monthly dividend of $0.038 per share, marking a notable 11.6% reduction from its prior payout of $0.043. This adjustment, effective January 1, 2025, raises critical questions about the fund’s strategy, risks, and the trade-off between income and capital preservation.

Background: The Managed Distribution Plan and Its Termination

VVR’s dividend structure has long been tied to its Managed Distribution Plan (MDP), introduced in October 2020 to guarantee a fixed monthly payout. Under the MDP, distributions were maintained even if income fell short, with any shortfall covered by return of capital (ROC)—a practice that reduces shareholders’ cost basis and fund net asset value (NAV).

However, in early 2025, Invesco announced the termination of the MDP, citing a need to align distributions more closely with the fund’s income-generating capacity. The $0.038 dividend reflects this shift, as the fund now prioritizes sustainability over rigid consistency.

Why the Cut? Performance and Structural Challenges

The reduction stems from two key factors:

1. Declining NAV and Income Generation:
2. VVR’s NAV has trended downward, falling from $4.02 in June 2024 to $3.64 by May 2025 ().

3. The fund’s primary asset class—floating-rate senior loans (comprising ~80% of its portfolio)—faces headwinds in a volatile interest-rate environment. While these loans benefit from rising rates, their prices can drop in falling-rate scenarios, squeezing income.

4. High Costs and Leverage:

5. VVR carries a 33.27% leverage ratio, amplifying both gains and losses.
6. Its total expense ratio of 5.20% (including interest costs) creates a heavy burden, leaving less income to distribute.

The Implications of the $0.038 Dividend

While the payout reduction may disappoint income seekers, it signals a strategic pivot to avoid overpromising. Key considerations for investors:

1. Return of Capital Concerns

Even at the reduced rate, part of the dividend likely remains return of capital. For instance, in February 2025, 36% of the $0.038 payout was sourced from ROC, per Section 19 Notices. Over time, this erodes NAV and could lead to capital losses if not offset by gains.

2. Yield vs. Risk

The fund’s trailing 12-month yield (TTM) of 13.63% (as of May 2025) remains enticing, but it comes with trade-offs:
- Volatility Risk: VVR’s shares trade at a discount to NAV (e.g., $3.60 vs. $3.64 as of May 2), reflecting investor skepticism.
- Leverage Risk: The fund’s use of borrowed funds amplifies losses in downturns.

3. Tax Implications

While the dividend appears generous, shareholders must await Form 1099-DIV to determine the tax treatment. Portions classified as ROC reduce cost basis and may incur capital gains taxes later.

Performance in Context

VVR’s NAV returned 4.12% YTD through May 2024, but its leverage-heavy structure and reliance on senior loans make it sensitive to economic cycles. For comparison, the SPDR Bloomberg Barclay’s Senior Loan ETF (BKLN)—a peer tracking similar assets—yielded ~6% in mid-2025, half of VVR’s rate but with lower leverage (0% vs. 33%).

Conclusion: A High-Yield Play for Aggressive Investors

The $0.038 dividend underscores Invesco’s attempt to balance income with sustainability, but it is not without risks. Key data points reinforce this assessment:

• Yield vs. NAV Stability: The 13.63% TTM yield is unmatched among senior-loan funds, but NAV has fallen 9.5% since mid-2024.
• Costs: The 5.20% expense ratio exceeds the average for its category, eating into returns.
• ROC Exposure: Over 30% of recent distributions have come from ROC, signaling income strains.

For income-focused investors with a high risk tolerance, VVR’s dividend offers outsized returns. However, its leverage, fees, and dependency on ROC make it a speculative bet rather than a conservative hold.

Before investing, analyze your risk appetite and consider alternatives like lower-leverage loan ETFs or dividend-paying equities. The $0.038 dividend may shine, but the risks lurking beneath demand careful scrutiny.

In the end, Invesco Senior Income Trust’s reduced payout is both a warning and an opportunity—one that demands vigilance for those willing to chase high yield.