Convertible Income Fund's 10% Yield Comes with Leverage and Rate Concerns
The Virtus Convertible & Income Fund pays a 10.25% dividend yield and trades at a 9.34% discount to net asset value, close to its five-year average. The fund uses high leverage of 33.22%, with a portfolio heavy in convertibles and high-yield bonds across IT, industrials, and financials. Its preferred shares yield 7.22%, trade below par, and carry an A rating, though persistent high rates could threaten dividend stability and cause a share price dip.
The Virtus Convertible & Income Fund allocates roughly two-thirds of its portfolio to convertible securities and nearly a third to high-yield bonds, with the remainder in other assets. Its sector weightings are concentrated in information technology, industrials, and financials, reflecting the fund's focus on growth-oriented yet credit-sensitive areas of the market.
The fund's preferred shares, which carry an A rating and yield 7.22%, currently trade below their par value. This preferred tier sits ahead of common shares in the capital structure, offering a measure of protection. However, the fund's overall leverage of 33.22% amplifies both potential returns and risks, making its dividend sustainability sensitive to the trajectory of interest rates.
Persistent high interest rates could pressure the fund's ability to maintain its 10.25% common dividend, potentially affecting income-focused investors, particularly retirees who rely on such payouts. A dividend cut could trigger a temporary share price decline, impacting total returns for current holders. While preferred shareholders have some safety, common shareholders bear the primary risk, highlighting how monetary policy decisions can ripple through retail investment portfolios.