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Safe 8%-Plus Dividends in a Zero-Percent World

Friday, October 18, 2013 5:01

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Where’s the income today?

Let’s face it, we live in a near-zero-percent world. Traditional income investments aren’t cutting it.

Utility stocks, for example, currently pay their lowest dividend since the 2009 crash. And 10-year U.S. Treasurys pay just 2.7%. After inflation, you’re getting nothing.

However, there is one investment that’s paying big yields… more than 5%. And thanks to a tax advantage, that yield could be worth 8%-plus. You could even earn double-digits with the right fund.

This investment pays a higher yield than any other safe income opportunity… yet, everyone is too scared to buy.

Today, the best income opportunity I see is in municipal bonds.

Let me explain…

Municipal bonds are loans to state and local governments. These loans generate the money required to build roads, schools, and sports stadiums.

Importantly, because these bonds provide cash to the community, the federal government gives bond holders a break. Muni-bond holders pay zero federal tax on their interest income. And that tax treatment is incredibly important…

You see, according to the Bond Buyer 25 Yield Index, a basket of high-grade, 30-year muni bonds pay 5.2% interest today. By contrast, a 30-year U.S. Treasury pays around 3.75%.

Obviously, muni bonds are a good deal without a tax benefit. But it gets better…

Say you’re a high-income earner. If you’re in the top income tax bracket, you’ll pay 39.6% of your Treasury yield to the federal government. So your 3.75% interest payment is suddenly only worth 2.27%.

After inflation, it’s worth nothing.

Muni bonds, on the other hand, require no tax payment. So for top earners, the 5.2% yield is worth a tax-equivalent 8.6% yield. Said another way, you’d need to make an 8.6% yield in a traditional investment to equal the 5.2% yield in municipal bonds.

Throughout history, U.S. Treasurys have paid a higher interest rate than muni bonds. For example, since 1979, 30-year Treasurys have paid 0.3% more, on average, than 30-year municipal bonds. With the tax advantage of muni bonds, the higher Treasury rate makes sense. But it isn’t happening today.

Right now, municipal bonds pay 1.48 percentage points more than Treasurys. And this historically high spread gives us a great chance to buy.

My colleague Dr. David Eifrig has put dozens of hours into studying the muni market. And one of his top recommendations is the Invesco Insured Municipal Income Trust (IIM). The fund is a perfect example of this excellent opportunity.

You see, IIM is a closed-end fund. That means it has a fixed number of shares. Unlike an exchange-traded fund (ETF), closed-end funds can’t create shares. So the fund’s price can fluctuate around the true value of its assets… in this case, the muni bonds IIM owns.

So when investors are scared of muni bonds, they might sell IIM in masses, causing the fund to trade for less than its true value. Right now, that’s exactly what’s happening.

IIM currently trades for an 11% discount to its true value. The last time its discount was this large was in August 2011. The fund soared 35% in just seven months.

Could we be on the verge of another 30%-plus boom? Sure. But that’s not why I’m interested in buying today…

IIM pays a hefty 6.8% dividend, as I write. That’s a tax-equivalent yield of 11.3%. It’d be great if shares soared… But even if they don’t, it’s worth the chance to safely collect double-digit yields over the next few years.

Closed-end funds like IIM can be volatile. But today, you can buy at an 11% discount and collect an 11.3% tax-equivalent yield (if you’re in the top tax bracket). I’m willing to stomach a little volatility for that kind of opportunity.

It might seem like income is impossible to find today. But municipal bonds are offering safe, 8%-plus tax-equivalent yields. And shares of IIM are paying double digits.

Most investors are too scared to buy. And that’s giving us a safe opportunity to collect big income. Don’t miss it.

Good investing,

Brett Eversole

Source: http://www.stansberryresearch.com/dailywealth/2550/safe-8-plus-dividends-in-a-zero-percent-world

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