PCF - NCV: High Yield And Fully Covered Distribution

2025-03-21 16:36:03 ET

Summary

• The Virtus Convertible & Income Fund offers a high yield of 12.37%, but has struggled with negative real returns and distribution cuts over the past decade.
• The NCV closed-end fund invests primarily in convertible bonds, which have better inflation protection than traditional bonds, but its management has underperformed relative to indices.
• Recent performance has been volatile, with a slight gain of 1.46% over ten months, but distributions have helped offset share price declines.
• The fund's leverage is relatively high at 36.82%, and its expense ratio is 4.75%, with a discount to NAV of 9.97%, making it reasonably priced compared to peers.
• The fund fully covered its distribution during the most recent reporting period.

The Virtus Convertible & Income Fund ( NCV ) is a closed-end fund, or CEF, that provides investors with a method of achieving a very high level of current income from the assets in their portfolios. There are many closed-end funds that make a similar promise, so this fund is hardly unique in this respect. However, many funds that focus on providing their shareholders with substantial levels of income achieve it by investing their assets in fixed-income securities. This makes sense given that fixed-income securities have higher yields than most common stocks. We can see this by looking at the current yields of the major fixed-income indices:

The yields of all of these indices are significantly higher than the 1.25% current yield of the S&P 500 Index ( SPY ). Even if we exclude the notoriously low-yielding information technology sector, the remaining constituents of the S&P 500 Index ( SPXT ) only have a 1.30% current yield. Thus, fixed-income securities clearly have substantially higher yields than common equities today. As the objective of many income investors and income-oriented funds is to generate as high a level of income as possible, they will generally prefer fixed-income securities to equity securities for this purpose. After all, if an investor only has a given amount of capital to deploy, they could earn substantially more income by purchasing fixed-income securities with higher yields....

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