Unable to convert dmg to encrypted dmg on Yosemite
I've figured it out! Though still appears that converting a dmg file to an encrypted one using Disk Utility is still broken as of OS X 10.10 (Yosemite), I've figured out a way to do it via terminal using this:

hdiutil convert /PATH/TO/FILE -format UDZO -encryption AES-256 -o /OUTPUT/FILE


This converts a dmg using AES-256 encryption and uses zlib compression. I hope that Apple fixes this in Yosemite soon though. I got some inspiration/help from this Super User question: Further compressions of disk image files