A Tax-Free Monthly Dividend Yield
Saturday, August 25, 2012
Printer-Friendly | PDF Version | Whitelist Us  | Also visit StreetAuthority

A Tax-Free Monthly Dividend Yield

-- By Amy Calistri 

If Congress lets the "Bush era" tax cuts expire, then you'll be glad to have these investments in your portfolio.  (Full Story Below)

Also in Today's Issue...

10 Simple Ways to Earn Extra Retirement Income This Year
For an instant boost to your income, look no further. One of our picks is yielding 14.5% right now, and it's handed investors 72% total returns since 2008. Learn more about this stock - and 9 others - in this special report.
Pay Your Mortgage With Options?
Or, you could pay your car payment, take a trip to visit the grandkids or go on a long overdue vacation. It's possible thanks to the income generating power of options. And best of all, options are actually much safer than you've been led to believe - if you know what less than 1 in 4 investors know about using options to generate income. For a proven way to increase income in retirement, click here.

A Tax-Free Monthly Dividend Yield

December 31st, 2012... Mark it on your calendar.

On that day, the "Bush era" tax cuts are set to expire.

If Congress decides not to renew the cuts, then starting in 2013, the dividends you receive from your income investments will be taxed at your marginal tax rate, rather than the reduced 15% rate income investors have enjoyed for the past nine years.

 

While there's no telling how this situation will pan-out in Congress, if the prospect of higher-taxes keeps you up at night, then you do have some options.

There is still one asset class that offers steady dividends, above-average yields and better yet... the distributions you receive from these investments are 100% tax free.

I'm talking, of course, about municipal bonds.

Municipals bonds or "munis" are a unique asset class. Like treasuries, munis are issued by the government. But instead of coming from the federal government, these bonds are issue by local municipalities like cities, counties and public utility districts.

Historically, the U.S. government feared that taxing municipal bond distributions would hurt a state's ability to raise money. As a result, muni investors don't have to pay taxes on the interest payments they receive.

Generally speaking, these bonds come in two forms. There are general obligation bonds -- bonds that are backed by the taxing authority of the municipality. And there are revenue bonds -- bonds are backed by fees such as tolls or utility rates.

These dependable income streams are the primary reason municipal bonds have historically had much lower default rates than corporate bonds.

Prior to 2009, the default rate for non-investment grade municipal bonds was 2.7%... versus a default rate of 19.1% for similarly rated corporate bonds.

That trend has broken down over the last couple of years. Due to depressed property values and larger pension bills brought on by the great recession, some municipalities have struggled to pay their debts recently.

In 2010 and 2011, municipal bond defaults rose to 5.5%, higher than their historical average of 2.7%. As a result, buying a single municipal bond looks risky right now...

But municipal bonds still have their advantages. And if tax-free income sounds like something you're interested in, then a bond fund like PowerShares Insured National Municipal Bond Portfolio (NYSE: PZA) could be worth your while.

By holding a portfolio of municipal bonds, a fund can minimize the impact of any single bond that may go into default. As a result, an ETF like PZA gives you all the advantages of owning individual muni bonds, but without a lot of the risks.

And if the added diversification wasn't enough to make PZA attractive, there's another reason to like this fund right now.

In order to get a more favorable credit rating, municipal bond issuers can buy insurance. These insurance policies pay interest to bondholders in the event the issuer defaults.

Most of the companies that issued municipal bond insurance were the same companies that issued mortgage insurance during the housing bubble. After the bubble burst, many of these insurers went bankrupt or left the business.

With so many companies exiting the insurance space, it's hard to find insured muni bonds right now... which is why I like PZA. PZA tracks an index of insured municipal bonds. All of its rated bonds have an investment-grade rating of "A" or above.

Right now, PZA pays a monthly dividend of $0.09 per share. At today's share price of $25.58, PZA is currently offering a 4.2% dividend yield. And if the "Bush-era" tax-cuts aren't renewed at the end of this year, then your yield will actually be a lot higher since the interest payments are tax-free.

Municipal bonds are one of the few asset classes that offer tax-exempt income. And unless Congress gets its act together that will become an even bigger benefit come December 31.

Municipal bonds will likely see higher historical default rates in the foreseeable future. But a fund such as PZA -- one that holds a large number of insured municipal bonds -- can help minimize both your risks and your taxes.

Always searching for your next paycheck,

Amy Calistri
Chief Investment Strategist -- The Daily Paycheck

P.S. -- If you haven't done so, you can learn more about my income investing advisory, The Daily Paycheck. In the past year, I've collected more than $13,000 in dividends. Learn more about how you can do the same thing by visiting this link.

Disclosure: Neither StreetAuthority nor Amy Calistri own shares of the securities mentioned in this article. In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any "real money" model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.


Income Notes

As of Friday's close, the five highest-yielding stocks in the S&P 500 were:

1. Pitney Bowes (NYSE: PBI)
- 11%

2. Windstream (Nasdaq: WIN)
- 10.5%

3. RR Donnelley (NYSE: RRD)
- 9.1%

4.
Frontier (Nasdaq: FTR)
- 8.8%

5. CenturyLink (NYSE: CTL)
- 7.0%

-- Research Staff


10 Best Retirement Income Stocks Now

Some pay quarterly. Others pay monthly. All offer you a safer, more stable, and reliable source of high income even if the market goes down.

Get the full details and stock symbols here.


Breaking News

The Safest Dividend Stocks In The S&P 500

When the market hits a rough patch, you'll be happy to have these dividend stalwarts in your portfolio.

Read On...


World's Greatest Business #1: Increasing Dividends 21% in a Year

If you aren't investing in the "World's Greatest Businesses," then you could be missing out on some of the biggest opportunities the market has to offer.

Read On...


Four Ways To Boost Yields And Returns

What's the secret to building a strong high-yield portfolio? While there is no magic bullet, I do have some rules I follow to create portfolios that pay nearly double-digit yields and see strong capital appreciation.

Read On...



 


 

Home | Issue Archives | About Us | Meet the Staff | Subscribe
Premium Content
Research Reports | Media Coverage | Testimonials | Advertise

Dividend Opportunities is a publication by StreetAuthority, LLC, 4601 Spicewood Springs Rd, Building 3, Suite 100, Austin TX 78759 or www.StreetAuthority.com. You are receiving this newsletter because you visited us at StreetAuthority.com and registered to receive our complimentary investing newsletter -- Dividend Opportunities. If you feel you have received this issue in error, please follow the instructions below to unsubscribe or contact us by visiting our web site.

DISCLAIMER: StreetAuthority, LLC is a publisher of financial news and opinions and NOT a securities broker/dealer or an investment advisor. You are responsible for your own investment decisions. All information contained in our newsletters or on our web site(s) should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision. As a condition to accessing StreetAuthority materials and web sites, you agree to our Terms and Conditions of Use, available here, including without limitation all disclaimers of warranties and limitations on liability contained therein. Owners, employees and writers may hold positions in the securities that are discussed in our newsletters or on our web site.

The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions.
StreetAuthority receives no compensation of any kind from any companies that may be mentioned in our newsletters or on our web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities discussed in this report or on our web site.

To Unsubscribe
You may choose to stop receiving our Dividend Opportunities newsletter at any time.
Unsubscribe here.

Subscribe for FREE

Subscribe to Dividend Opportunities today and you'll receive a FREE newsletter four times a week, plus a FREE in-depth research report that identifies some of today's highest-yielding securities.

There's absolutely nothing to purchase, we'll keep your email address private, and you can cancel at any time. You truly have nothing to lose, so take advantage of this no-hassle, risk-free offer today!

Click here to subscribe now.