If you’re looking for tax-free yields, municipal (“muni”) bonds can provide you with 5%+ distributions that Uncle Sam won’t touch.
With rates rising, it is a bit tricky to make savvy buying decisions at the moment. But income investors buying smartly today are banking 5%+ yields – and paying as little as 88 cents on the dollar!
For quick profits, it’s best to buy munis after mini-panics. They seem to happen every year or two, presenting us levelheaded contrarians with safe yields for cheap. (Most recently, readers who followed my advice and bought munis after an irrational “tax plan panic” enjoyed total returns up to 16.7% in just 12 months!)
Today: Big Discounts Plus Demand Outpaces Supply
For longer-term income investors looking for steady monthly paychecks, the best time to buy munis is usually anytime – especially for those in a high tax bracket. Muni distributions, after all, typically get a pass from Uncle Sam at the Federal level. (And state-specific funds will extend that dividend courtesy to your state’s tax return as well.)
I do regularly hear from readers who want more muni ideas. But you know me: why would we discuss an investment unless it’s a bargain?
Well today, certain muni vehicles are cheap (details on which ones shortly). Plus demand for these tax-free bonds is outpacing their supply this summer. Nuveen reports there are only $56 billion in new muni issuances from June through August. Meanwhile, expiring munis are spinning off an extra $95 billion looking to be reinvested.
Headline-reading investors worry about things like “spreads” in munis – or their
interest rate advantage over U.S. Treasuries. The margin is as thin as it’s been in years. And it’s a valid concern for those who don’t know how to buy the right muni bonds.
But investors who do know munis are banking 5%+ tax-free yields today. And some are even securing big margins of safety to boot! How? Simply by selecting the best muni closed-end funds (CEFs).
5%+ Tax Free Yields at Discounts Up to 12%
Buying a CEF is even easier than buying individual muni bonds. We simply enter the ticker in an online brokerage account, click the “Buy” button and we’ve got a fund with a handpicked portfolio of 900+ muni bonds (and monthly distributions to follow).
Our tax-free distributions get even better when we buy at a discount. Because CEFs each have a fixed share count, they can trade above and below their net asset values (NAVs). An 8% discount, for example, means we’re buying $1 worth of munis for just $0.92.
It also means that we receive more yield. For example, Nuveen’s AMT-Free Municipal Credit Income Fund pays a 4.9% distribution on its NAV. But investors who buy shares today will actually earn 5.3% on their investment (thanks to its 8% discount).
Plus, there’s more:
- The 5.3% yield is exempt from Federal taxes, and
- The fund’s 8% discount is potential upside for us if and when this window closes.
Not interested in selling for upside? That’s fine – buy these funds at a discount anyway to protect your downside risk.
And since I know most of my readers are buy and hold income investors, let me give you five muni funds that are bargains today. All five pay 5% or more, are exempt from Federal taxes and trade for a 6% to 12% discount to the value of their underlying bond portfolios.
These funds have also been excellent long-term investments. This is important because, in my experience, past performance is the best indicator of future results in CEF-land. This is especially the case for munis, where the best managers consistently deliver “alpha” thanks to their unfair advantages (connections and capital) in this less-than-efficient corner of the market.
5 Muni Funds with 5%+ Tax-Free Yields
Each of the funds above have returned 6% or better on their portfolios since inception, which means the managers are well connected and that they know what they’re doing. They are also poised to outperform their historical norms, thanks to the generous discounts they trade at today.
View Original Post