NZF: Why You Should Be Invested In Muni Bonds (NYSE:NZF)

Main Thesis

In this article we review the Nuveen Municipal Credit Income (NZF) closed end fund. The fundamentals are just fine overall and the fund can deliver a high-yield that is exempt from federal taxation. However, perhaps because of persistent distribution cuts, the fund trades at an attractive discount to NAV. Notwithstanding the pesky distribution cuts, NZF can be a great value addition to your portfolio. Furthermore, we demonstrate why you should consider building your wealth with municipal bonds.

Investment Strategy

(Source: Nuveen)

NZF is invested in a diversified portfolio of intermediate duration national munis that are primarily investment-grade. With muni defaults being historically rare, the primary concern here is heightened volatility due to interest sensitivity and leverage. In the wake of the Covid crisis, NZF investors have actually benefited by the Fed cutting short-term rates.

High Income, but…

(Source: Original Image – data from Yahoo Finance)

Assuming a federal tax rate of 24%, NZF boasts a tax-equivalent yield of 6.57%. With an admittedly aggressive leverage ratio of about 39%, they have been able to spin off an impressive yield that is exempt from federal tax. Notwithstanding the high income, there have been a few distribution cuts over the years. That’s not ideal for retirees and other investors that want a stable supplement to their income.

Sustainability of Distributions

(Source: Original image – data from latest annual and semiannual reports)

In light of the distribution cuts, it behooves us to take a look at NZF’s financial statements to see what’s going on under the hood. They’ve done an excellent job of covering the distributions, perhaps by anticipating Net Investment Income. Furthermore, NII has remained relatively stable from year to year. Nuveen is really good about releasing monthly information about their funds – according to the latest data, NZF is consistently sporting a positive UNII figure.

(Source: CEF Connect)

An unavoidable drawback of investing in CEFs is the high volatility due to leverage. In the case of this fund, the aggressive use of borrowing in combination with intermediate-duration municipal bonds has resulted in some rather wild swings up and down. Notwithstanding the volatility, Nuveen deserves credit for maintaining this fund’s NAV amazingly well.

DRIP your way to a tax-free income stream

With all of that said, the key here is to have patience and let your investment grow. Nuveen offers a flexible DRIP plan to automatically reinvest your monthly distributions. For patient investors that have a long-term horizon and don’t mind the volatility, this can be a huge boon to achieving your goal of financial independence.

(Source: Portfolio Visualizer)

The above charts were generated by Portfolio Visualizer – they display the performance of NZF with monthly rebalancing and reinvested dividends. A $100K investment about 17 years ago would spin off an annual dividend yield of around 15% and very impressive capital growth to boot. Because the monthlies are exempt from federal taxation, that will make the income taxes easier to bear and give you tax-free growth similar to an IRA. The additional benefit is that you can cash out this portfolio in a brokerage account without having to wait until age 59.5.


All things considered, NZF is a great muni bond CEF for patient investors with a long horizon. It does offer high current income that’s well covered by NII, but we cannot recommend this fund to prospective investors that are hoping to live off the income right away – the NAV is simply too volatile. Reinvest the monthly distributions and let tax-free compounding work its magic for you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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