NCZ's Preferred Stock: Investment Grade Income With 6.8% Current Yield

Virtus Convertible & Income Fund II is highlighted for a 6.8% current yield on an 'A' Fitch-rated preferred (NCZ.PR.A) trading below par and already callable. While NCZ is described as leading A-rated CEF preferreds in yield and offering ~9.33% dividend yield with a ~10% discount to NAV, the fund faces risks from high leverage (~32%) and elevated expense ratios, warranting a cautious outlook.

Analysis

This is more of a capital-structure carry trade than a true catalyst-driven re-rating. For the preferred, the upside is mechanically bounded by call economics, so the real question is whether the stated yield compensates for refinancing risk, liquidity, and any future deterioration in the fund’s asset coverage. The common equity is the cleaner way to express skepticism because it absorbs leverage, fee drag, and volatility first.

Second-order, the key linkage is rates: if yields drift lower, callable income paper can outperform on the way to par, but that same move also shortens the remaining life of the trade. If rates stay sticky or credit spreads widen, the fund’s leveraged NAV should erode before the preferred itself is impaired, which means the common can underperform materially while the preferred holds up. That makes this a slower-moving months-long setup rather than a days-long event trade.

The contrarian miss is that headline yield is not the same as expected return when a security is already callable. We care more about yield-to-call, the stability of asset coverage, and whether the discount is wide enough to offset liquidity risk. If those are not attractive, the better move is to pass and wait for a dislocation rather than force a low-conviction income trade.

Key Decisions for Investors

• Avoid initiating a new long in NCZ.PR.A here unless yield-to-call and asset coverage are materially better than peer preferreds; this is a carry trade, not a growth trade, so the hurdle rate should be high.
• If exposure is needed, use a small long NCZ.PR.A / short NCZ common pair over 3-6 months to isolate seniority and reduce leverage exposure; thesis fails if monthly NAV/coverage data deteriorates materially or the fund begins deleveraging.
• Use PFF or a broader preferred ETF as the cleaner expression of carry if the goal is portfolio income rather than issuer-specific relative value; this avoids single-fund leverage and fee drag.
• Set a watch item for the next monthly NAV and leverage update: if NAV drawdown accelerates or coverage compresses, prefer the common short over any preferred long.