Interest rates are low and it doesn’t look like that is going to change anytime soon.
Between trade wars and weak economic reports, it looks increasingly like the Fed will lower rates at least once this year, and traders in money markets are indicating they expect this to happen at the July meeting.
If so, that means it’s going to become even more difficult to earn a decent return from stable securities.
Treasury bill and bank CD rates will be microscopic, money market rates will inch even closer to zero, and high-quality bond yields will continue to be meager fare.
Turning to the historically low rates in the junk bond markets will be a disaster if the economy slows further – or worse, tips into a recession.
Adjustable rate levered loan funds and business development funds may appear attractive in theory, but in a slowing economy, theory can be even riskier than junk bonds.
Right now is simply a challenging – and potentially dangerous – time for folks looking for a safe, reasonable yield on their money.
I Love These Bonds – and You Should, Too
One of my missions here at Max Wealth is to help people who will need income to fight against the Fed’s negligence, and live the life they have been saving for over most of their lives.
As I pointed out on Tuesday, there are still some REITs that trade at attractive valuations, and can offer safe growing yields that help grow your nest egg or augment your retirement income.
However, if you have a bunch of cash that you have saved up over the years outside of a retirement plan, even REITs can be an issue as the income is fully taxable which can shave quite a bit off your actual return.
Fortunately, there is a common sense answer that not only has a decent yield, but the cash you receive every month is tax-free.
If you live in a high tax state, you can even get an income stream that isn’t taxable at the state and local level.
I am talking about tax-free municipal bonds.
These are bonds issued by states and local government to finance everything from roads and hospitals to sports stadiums. The interest they pay is federally tax-free, and if you buy a bond issued in your own state, it’s usually free of state and local income taxes as well.
I love municipal bonds for income-seeking investors.
When I joined a small regional brokerage firm in Annapolis, MD back in 1993, pretty much all we did was small bank stock and municipal bonds.
The only things more stable than municipal bonds with a solid credit rating are U.S. Treasury Bonds, and on an after-tax basis, the muni bonds allow you to keep more of the cash.
I’m also a big fan of the fact that, more often than not, the proceeds of muni bonds are being used to make the world a better place.
State and local governments use these bonds to raise money for hospitals, schools, roads, libraries, universities, public transportation, and a host of other projects that make our world better, smarter, and safer.
How Muni Bonds Can Work for You
I could stop there and just tell you to buy muni bonds, but that would be a disservice.
Muni bond markets can be tricky, and you have to have a decent relationship with a broker to purchase new, or popular issues. The market is not as transparent as most others, and it’s hard to see the real price of a bond at any given moment. It has gotten better, but it’s still not the most user-friendly market for individuals.
So, the answer is to be a tax-free bond fund, managed by professionals who do see the price and get first look at new issues, right?
That’s absolutely correct, but I would not be me if I didn’t take the whole idea one step further.
Why pay a fair price for my investments when with a little digging, I can find a way to buy muni bonds for less than they are worth?
Enter closed-end muni bond funds.
These funds are traded on the stock exchanges, and depending on the mood of the market, they may sell for more or less than the actual value of the bonds.
They are sold in IPOs by brokerage firms, but once the offer is done, there is a little follow-up marketing for support for the funds.
As a result, they tend to be ignored and skip to a discount to the actual net asset value of the fund. When that discount reaches double digits, I become very interested in tax-free closed-end funds.
New York is a very high tax state, so if you have cash outside of your IRA or 401(k), you might consider a fund like the BlackRock MuniHoldings New York Quality Fund (NYSE:MHN).
The fund sells for almost 12% less than the value of the bonds and cash it holds right now, and the yield is over 4% at the current price.
Four percent might not sound exciting, until you realize that you would have to earn 7.5% to match that combination of safety and income, which is pretty close to impossible in today’s low-yield world.
Those of you who aren’t that concerned about state taxes, but still want to keep Uncle Sam’s hands in his own pockets, you can look at funds like BlackRock MuniYield Quality Fund III (NYSE:MYI).
This fund is yielding over 5% tax-free, and trades at a discount to the value of the bonds and cash in the portfolio of about 10%. That yield is equal to an 8% taxable investment.
There is often an opportunity to make money in another way than just the income stream with tax-free closed-end funds.
The discount can narrow over time, especially if the stock market begins going south, and investors are looking for safety. This happened both when the Internet bubble burst and during the Credit Crisis stock market implosions.
Discounts can also narrow if investors begin to fear that income taxes will rise in the near future, and it’s a pretty safe bet as we inch closer to the 2020 elections as all the noise and news begins to fill the airwaves and interwebs.
It’s not a great time to begin investing for income.
The Fed policy of the last decade has been devastating for investors looking for safe ways to earn dependable returns on their cash.
As I mentioned, I want to help people who need this income so they can live the life they have been saving for over most of their lives.
That’s something I do week after week in my elite trading research service, Heatseekers. I help build my readers’ portfolios with companies that use my battle-tested, winning rules that can help you get where you want to be in life.
You can read more about it by clicking here.
Let’s play ball!