Is MFS Intermediate High Income Fund's 10% Yield Sustainable? A Deep Dive into Dividend Strength and Institutional Confidence

The MFS Intermediate High Income Fund (NYSE: CIF) has grabbed investor attention with its 10.29% dividend yield, one of the highest among closed-end funds. But as the fund declared its June 2025 distribution—$0.01432 per share—investors face a critical question: Can this elevated payout endure? Let's dissect the fund's yield sustainability, institutional sentiment, and the risks lurking beneath the surface.

The Dividend Breakdown: Income or Return of Capital?

The fund's May 2025 distribution of $0.01404 per share was 53% sourced from return of capital or other capital sources, with only 47% from net investment income. This signals a growing reliance on returning principal to maintain its dividend—a red flag for long-term sustainability. While the fund's managed distribution plan allows such practices, shareholders should note that return of capital reduces the fund's net asset value (NAV), potentially eroding future returns.

The data reveals a steady payout increase since 2023, but the rising proportion of return of capital (now over 50%) underscores the challenge of sustaining this trajectory. With an annualized distribution rate of 9.41% of NAV as of April 2025, the fund is treading a fine line between attractive yield and structural imbalance.

Yield Sustainability: The Math Doesn't Lie

To assess sustainability, investors must compare the fund's income generation to its payout obligations. The fund's trailing 12-month net investment income (NII) per share is $0.08735, yet its annualized distribution totals $0.18—a gap of $0.09265 per share. This deficit is being filled by return of capital and, potentially, long-term capital gains. However, without a rebound in underlying bond yields or a sharp rise in portfolio valuations, this gap could widen.

Compounding the issue is the fund's 3.95% expense ratio, among the highest in its peer group. High fees eat into returns, leaving less margin for error in covering distributions. The fund's leverage—30.85% of assets—further amplifies volatility, as interest costs on borrowed capital squeeze profitability.

Institutional Sentiment: Mixed Signals Ahead of Key Milestones

Institutional investors hold 1,704,477 shares (28.17% more than the prior quarter), signaling some confidence in CIF's value. Major holders like Sit Investment Associates (1.08 million shares) and GWM Advisors (though they trimmed holdings) suggest a divided stance. However, Susquehanna International Group increased its stake by 50%, hinting at opportunistic buying at current prices.

Yet, the July 2025 expiration of expense waivers—a temporary relief lowering costs—could trigger a sell-off. If expenses rise post-waiver, the fund's already tight margins may force a dividend cut or NAV decline. Analysts have already flagged this risk, with Gary Alexander of Morningstar assigning a "Hold" rating, citing the need for caution until this milestone passes.

Key Risks to Monitor

1. Return of Capital Erosion: Over 50% of distributions now rely on returning principal, which reduces NAV and increases expense ratios as assets shrink.
2. Interest Rate Sensitivity: The fund's high leverage (30.85% of assets) and exposure to high-yield bonds make it vulnerable to rising rates, which could depress bond prices.
3. Discount to NAV: CIF trades at a -6.18% discount, leaving little room for error if sentiment shifts. A widening discount would exacerbate losses for shareholders.

The Bottom Line: A High-Reward, High-Risk Opportunity

The MFS Intermediate High Income Fund offers an unmissable 10.29% yield, but its sustainability hinges on navigating three critical hurdles: closing the income gap, managing leverage costs, and avoiding NAV erosion from return of capital. For aggressive income investors willing to accept risk, CIF could deliver outsized returns if the Fed pauses its rate hikes or bond yields rebound.

However, the July expense waiver expiration and the fund's structural challenges make this a “high conviction, low allocation” play. Consider a small position with a stop-loss below the current $1.69 price, and monitor the fund's Q3 2025 performance closely. For most investors, sticking with lower-risk income vehicles like ETFs or dividend aristocrats may be wiser—unless you're prepared to bet on a turnaround in high-yield debt markets.

Act now if you're comfortable with risk—but don't bet the farm on this 10% yield.