If you think the Federal Reserve’s “zero-percent interest” policy means “zero investment income,” think again…
Now is a great time to get started on earning investment income. And over the next few days, I’m going to show you how and why you should get started immediately.
You see, during the 1980s and ’90s, folks were able to earn around 5% on their savings through basic bank deposits. Things were “normal” back then. The economy was healthy. Banks could pay a decent rate of interest to attract depositors, then lend money out to borrowers and make a solid return.[ad#Google Adsense 336×280-IA]But in the past few years, interest rates have dropped to zero. This has driven money out of traditional savings vehicles and into stocks and corporate bonds. All that money running for yield has made it harder for the average saver to earn safe income on his money…
But as I’m showing readers of my Retirement Millionaire advisory, it’s not impossible… you just have to look past “doom and gloom” hype, and focus on facts.
For example, high-profile analyst Meredith Whitney scared the wits out of many municipal bond investors last year. She got a lot of attention for predicting “hundreds of billions of dollars” in municipal bond defaults. But the facts just don’t support it. Let me show you what I’m talking about…
Municipal bonds are like loans made to state and local governments: You give them cash; they pay you interest and promise to return the full amount of your loan after a set amount of time. To encourage you to lend to municipalities, the government makes “munis” exempt from federal income tax… and often state and local taxes, too.
That makes them a great option for earning income. A 6% yield from a municipal bond is equivalent to a 10% yield for someone who pays 40% in federal and state income taxes.
Of course, these are only a good income bet if you can trust that your principal (the cash you loan to your state or local government) is safe. With smart people like Meredith Whitney claiming it’s not, should you really be putting your money here?
I’ve covered a few of my main arguments why here in DailyWealth before. But here’s a quick rundown…
First, the key question surrounding default is whether the municipality can cover its interest payment, or “debt service.” It turns out the debt service makes up a small part of the average state budget. The ratings agency Fitch reports debt service is “less than 10% of the government’s budget.” Income and property taxes are half that percentage at the state and local levels. Hardly reasons to renege on municipal debt.
Second, after falling 1.7% in 2009, state personal income rose 3% in 2010. From 2009 to 2010, tax revenue has climbed more than $30 billion. More tax revenue means more secure interest payments and lower default risk. Muni-bond investors are more likely to get their money back over time.[ad#article-bottom]Third, so far in 2011, only nine localities have defaulted. Their defaults totaled $0.25 billion, compared to about $1 billion by the same time last year. Municipal bonds are getting safer.
And finally, you can buy municipal bonds that are insured against default, and still collect a super-rich yield. For example, my Retirement Millionaire readers own the Nuveen Premier Insured Municipal Income Fund (NIF). This fund holds investment-grade bonds from several states including California, Texas, and Illinois. It trades at a 3% discount to its net asset value, so we can buy it for $0.97 on the dollar. It spreads your risk across many different bond issues. And right now, it’s paying a taxable-equivalent yield of 10%.
If you’re looking for income, this is exactly the opportunity you need. You can collect much more than you would in the bank, take advantage of others’ misplaced fears… and rest assured that your principal is safe.
— Doc Eifrig
*NIF invests primarily in tax-exempt municipal obligations which are either covered by insurance guaranteeing the timely payment of principal and interest or backed by an escrow or trust account containing sufficient U.S. Government or U.S. Government agency securities to ensure timely payment of principal and interest.[ad#jack p.s.]
Source: Daily Wealth