Muni bonds: The Rodney Dangerfield of investments

A good investment is like cheering for a bad sports team. Sooner or later, they are bound to win. You just have to hang in there. In 2009, I wrote about my favorite “worst team,” municipal bonds. (You can get a copy of the article in my free e-book, The Armchair Investment Reader, by visiting www.RetireIQ.com and mentioning the e-book).

Although “muni” bonds have performed solidly since that time, they do not get the respect or admiration showered on their nearest competitor, the treasury bond. When the sky is falling, what does everyone rush to buy? Treasury bonds. When bonds are mentioned in TV shows and newspapers, what bonds are referred to? Treasury bonds. When Treasury bonds get downgraded to AA+, what does everyone buy at ridiculous premiums? Yep. Treasury bonds.

This unpopularity creates opportunity for nimble bargain hunters. Besides selling at cheap prices, these local government and state bonds have a lot to offer. Some of their advantages:

• Tax-exempt income: almost all are federally tax exempt
• Double tax-exempt income: if you buy a muni in your state of residence then you also get a state tax-exemption
• Triple tax-exempt income: if you live in a city like New York with local tax, then you get a third exemption
• Different behavior: municipals tend to attract domestic investors looking for tax breaks. This can make munis move less sporadically compared to Treasury bonds
• High passive income: the S&P 500 yields 1.73% (after 21 percent federal tax). Highly-rated municipal bond funds are yielding over 4.5%
• Safety: while not risk-free, they are second only to T-bonds in safety

The well-known writer and professor, Burton Malkiel, just endorsed these hidden treasures in a recent Wall Street Journal article. He stated that “High-yielding diversified portfolios of tax-exempt bonds are available through closed-end investment companies….they provide yields between 6 and 7 percent.” He went on to conclude: “If tax rates increase in the future, they will become even more attractive as investments.”

I prefer a mutual fund rather than individual bonds. They are more liquid, diverse and transparent. After running a screen on www.Morningstar.com, I found BlackRock National Municipal Income (symbol: MDNLX). Its yield is 4.49 percent. BlackRock is the largest asset manager with over $3 trillion under management. The fund is spread out across the U.S. with 412 different bonds.

A closed-end fund, like Mr. Malkiel mentioned, tends to use leverage and to be more volatile. For this you can get a higher yield. One stand-out was Nuveen Insured MuniOpportunity (symbol: NIO). The current yearly income is 6.02 percent. It is invested across 409 different bonds.

Good investing, and happy New Year!

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Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his easy-to-read e-book Investing To Win by visiting www.RetireIQ.com or leaving a message on his prerecorded voicemail at (719) 924-5070. Simply mention Promo Code #9001 when ordering.