High-Yield Preferred Stock as a Stable Income Strategy in a Volatile Market

In an era of persistent macroeconomic uncertainty, income-focused investors face a paradox: traditional fixed-income instruments offer yields that fail to outpace inflation, while equities remain volatile. Against this backdrop, high-yield preferred stocks have emerged as a compelling middle ground. Among them, the Series A Cumulative Preferred Shares (NCZ.PR.A) of the Virtus Convertible & Income Fund II stand out, offering a forward yield of 6.61% and aligning closely with the fund's dual mandate of capital appreciation and income generation. This article examines how NCZ.PR.A's structure, credit quality, and strategic alignment make it a robust vehicle for stability in turbulent markets.

The Attraction of NCZ.PR.A's Yield

NCZ.PR.A, issued on September 11, 2018, pays a quarterly dividend of $0.34375 per share, translating to an annualized $1.375 per share. While this corresponds to a 5.50% yield on its $25.00 liquidation preference, the current forward yield of 6.61% reflects a market price below par, amplifying its appeal for income seekers. This premium yield is particularly striking in a landscape where 10-year Treasury bonds yield less than 3.5%, and corporate bonds offer only marginally higher returns. The shares' perpetual, cumulative, and callable nature further enhances their reliability: unpaid dividends accumulate and must be settled before common shareholders receive distributions, while the callable feature allows the fund to refinance if interest rates decline.

Credit Quality and Dividend Reliability

The Fitch Ratings "A" credit rating assigned to NCZ.PR.A underscores its strong credit fundamentals, a critical factor for investors prioritizing stability. This rating reflects the fund's disciplined approach to portfolio construction, which emphasizes issuers with robust balance sheets and adaptability to market shifts. The fund's management team, led by Voya Investment Management, reinforces this discipline by focusing on convertible securities and high-yield bonds with strong operational performance and credit metrics. Such rigor minimizes the risk of dividend cuts, a concern for preferred shareholders in weaker economic cycles.

Strategic Alignment with NCZ's Investment Philosophy

The Virtus Convertible & Income Fund II's strategy is explicitly designed to balance risk and reward. At least 80% of its assets are allocated to convertible securities and non-convertible income-producing instruments, leveraging the potential for capital gains while maintaining a steady income stream. This dual focus is critical for sustaining preferred dividends: convertible securities offer downside protection through equity-like features, while high-yield bonds provide consistent coupon payments. The fund's adaptability- shifting allocations based on market conditions-ensures it can navigate volatility without compromising its income objectives.

Management Expertise as a Differentiator

The fund's subadviser, Voya Investment Management, plays a pivotal role in its success. Its emphasis on identifying issuers with "operational performance" and "strong credit fundamentals" aligns directly with the needs of preferred shareholders. By prioritizing companies capable of weathering economic downturns, Voya reduces the likelihood of defaults or dividend suspensions. This expertise is particularly valuable in today's environment, where rising interest rates and inflationary pressures strain traditional income strategies.

Conclusion: A Compelling Case for Income Investors

For investors seeking stability without sacrificing yield, NCZ.PR.A represents a rare combination of attributes. Its 6.61% forward yield, bolstered by an "A" credit rating and a fund strategy that balances capital appreciation with income generation, offers a compelling alternative to conventional fixed-income assets. In a market where volatility is the norm, the alignment between NCZ.PR.A's structure and the fund's disciplined approach provides a rare degree of predictability. As such, it deserves serious consideration for portfolios seeking resilient, high-conviction income streams.