Stocks just hit their lowest point in six weeks… oil is crashing… gold stocks are crashing.
If you’re like a lot of people, this has you worried about your investments.
But if you own municipal bonds like I’ve urged you to for years, you’re enjoying stress-free, tax-free income. Today, I’ll explain what’s going on… and why the income will continue…
Regular DailyWealth readers know I’m a big fan of municipal bonds. I don’t know of anyone in the financial industry who has done more to promote the idea of owning muni bonds than I have.
[ad#Google Adsense 336×280-IA]As I’ve written before, municipal bonds are loans made to state and municipal governments.
To encourage investment in government projects, interest received from “munis” is exempt from federal income tax and, in many cases, state and local income taxes.
This makes them great ways to earn investment income… and keep it all for yourself.
For example, if you earn $1,000 in annual interest in a taxable investment, and you’re in the 28% tax bracket, you’ll pay $280 in taxes to the government… and keep $720.
In a tax-free investment, you’d keep all $1,000.
Since $280 is 39% of $720, you end up with 39% more money (and that’s just in the first year).
This simple example shows you how powerful the wealth-accumulating effects of tax-free investing can be.
I began recommending muni bonds to readers of Retirement Millionaire letter in 2008. I emphatically re-recommended them in 2011.
At the time, Wall Street sensation Meredith Whitney had just gone on 60 Minutes and warned of 50-100 “significant” municipal bond defaults that would add up to “hundreds of billions of dollars.” The market panicked.
But as I said at the time:
People believe the risk of default to municipal bonds is much higher than it’s ever been. More than during the Korean War, Vietnam, the 1987 Crash, the S&L crisis, or the tech bubble of 2000. In the past two months, the fear has been so rampant, California bonds are more expensive than Mexican bonds.
Since Whitney’s call three months ago, more than $30 billion have exited municipal bond funds. The pace is slowing a bit… But this is exactly the thing the crowd does at exactly the wrong time. They listen to mostly fear-driven hyperbole instead of simply looking at the numbers.
Another thing that has kept investors away from munis is the fear of rising interest rates. Rising rates decrease the value of fixed-income investments – including muni bonds.
But again, these fears have been overdone. Rates have remained low. As I’ve said all along, I don’t expect rates to rise sharply in the short term. Also, while interest-rate movements are notoriously unpredictable, we’ll have plenty of time to react if we do see them start to edge higher.
In short, the crowd’s misplaced fear of municipal bonds has given us an incredible opportunity to earn huge, tax-free income streams no matter what happens in the stock market.
For many people, that’s a huge benefit…
Take one of my favorite muni-bond funds, for instance… the Invesco Value Municipal Income Trust (IIM).
I began recommending IIM in Retirement Millionaire back in March of 2011. Since then, the share price has made incremental gains – it’s up about 13% in three years.
But each and every month – no matter what stocks have done – IIM has paid out a tax-free yield of more than $0.07 per share. That works out to a yearly income of about $0.90 per share… or 5.89% at today’s prices.
When you consider the tax benefits, it gets even better… You’d have to make more than 9% in a normal investment to match IIM’s post-tax income.
And these funds are STILL cheap… Right now, funds like IIM are trading at 6%-plus discounts to the value of their assets. Mainly because of the fears I mentioned above.
But as I said, these fears are overdone – as they have been for more than three years now.
And you can still take advantage of this misplaced fear to collect some of the largest, safest yields in the market… the kind of yields that will make you forget about stock market volatility like we’re seeing today.
Here’s to our health, wealth and a great retirement,
Dr. David Eifrig
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Source: Daily Wealth