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How to Get a Tax-Free, 9% Monthly Dividend Yield

Neil George

Who doesn’t like a deal, especially in these volatile stock market conditions that have been plaguing us for the past few months? And by a deal, I mean investments that are now trading at a discount to what they could be liquidated for by some 8% or more.

And how about if this deal pays a monthly dividend that’s yielding more than 9%?

And just to get you past the next question about risk — what if I told you that for the past 45 years from 1970 through 2015 (as studied by Moody’s) that this investment class, which is more than $3.9 trillion in size, has only had a problem with a mere 99 out of the thousands upon thousands of individual investments? That equates to a mere 1/10th of 1% of this particular market deal. And even then, most of them eventually paid investors off anyway so the actual losses for investors has been near nil and naught.

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And the extra kicker for this deal is that investors won’t owe a penny in Federal income taxes on that 9% and more yielding dividend payments.

So, you’re asking what could I possible be writing about that could be this good?

Municipal bonds.

There. I wrote it. Municipal bonds — the red-headed stepchild of the investment markets. This is the market that rarely gets a mention on the financial entertainment shows. But really, you need to take a peek at this market, because it really is a deal right now.

Municipal bonds offer yields that are well above U.S. Treasuries and even more so when taking into consideration the tax savings on interest and dividend payments.

And as I mentioned above, while the U.S. Treasury market hasn’t had a default yet — the track record for munis is pretty close.

Now, you might bring up Puerto Rico and its debt troubles from 2016. However, so far this year with the developing news of the dramatic improvement in the financial condition of the island territory, Puerto Rico munis have been rallying by more than 100% from December in the bond market.

Yet the general market for munis has run into a bit of selling this past January. This is when the realities of the Tax Cuts and Jobs Act (TCJA) came to the forefront of those that actually pay attention to this market. The result is that with lower income tax rates for corporations from 35% down to 21%, the attraction of municipal bonds to banking and insurance corporations became a bit less. And as these corporations are major buyers of munis — their selling is now providing the deal for you to scoop up.


Because, for most investors that are still paying Uncle Sam a 35% income tax rate — the allure and the advantages of munis hasn’t changed one bit. But the selling that resulting in a pull-back of 1.45% in the general muni market as measured by the S&P Municipal Bond Market Total Return Index from its January peak to its February bottom is making for a great buy right now.

But what about the Federal Reserve and its Open Market Committee’s (FOMC) moving it target range for Fed Funds? Well, we’ve already had one hike last month and more likely we will see two to three more minor hikes for the rest of 2018. More interesting is that when the FOMC upped its target range in March, the S&P Municipal Index actually continued to rally back from the February low.

And there’s a compelling case that the FOMC won’t have much of a reason to accelerate increases as the core inflation measure that it uses in the Personal Consumption Expenditure or PCE is well under the alarm level of 2.0% sitting currently at only 1.6%. The PCE tracks all consumer spending in the U.S. domestic economy rather than the contrived basket of goods that makes up the Consumer Price Index (CPI). And the PCE is actually down from 2016 and 2017.

So, the damage to rates has already been baked in and munis are actually beginning to bounce back.

What’s the best way to get the best deal in this market? There are three closed-end municipal investment funds that you should buy right now. Each is selling at a discount to their liquidation value by 8% or more. And for those in the 35% individual or married tax bracket — the taxable equivalent yield on these three funds is running at an average dividend yield of 9.11%

Look to buy the BlackRock Municipal Income Trust II (NYSE:BLE), the Nuveen Enhanced Municipal Crdt Opptys Fd (NYSE:NZF) and the Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG) together and enjoy great monthly dividends with funds trading at big discounts right now.

As of this writing, Neil George did not hold a position in any of the aforementioned securities.

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