This month, some investors are going to miss out on one of the world’s safest, best income streams… all because of Stockton, California.
Stockton is all over the national news right now. Last month, it became the largest U.S. city to declare bankruptcy. Stockton will default on the loans it accepted from investors. The city plans to cut government employee jobs and benefits.
“All that’s left is sadness,” said Stockton local Gary Gillis, to the L.A. Times. “Stockton has the most good, solid, down-to-earth people you’ll ever meet. And now things are going to get even harder for many of them.”[ad#Google Adsense 336×280-IA]Stockton’s crisis is fanning the flames of the same warnings municipal bond investors have heard for years now.
And a week after Stockton filed for bankruptcy, Mammoth Lakes, California filed for bankruptcy protection.
But if you can focus on facts, instead of hype, you’ll realize you can still make terrific amounts of tax-free income in municipal bonds.
There’s a growing worry that municipalities are showing signs of trouble.
And several are struggling to balance the books as required each year – like Stockton.
This will NOT HAPPEN.
Here are the facts…
As you may know, municipal bonds are loans made to state and municipal governments. To encourage folks to invest in the government, interest received from “munis” is exempt from federal income tax… and, in many cases, state and local income taxes. These bonds are one of the great friends to the income-seeking retiree… tax-free and safe.
Remember… the municipal bond market is huge… It’s over $3 trillion. So while Stockton is the largest city to declare bankruptcy – with over $500 million in debt – it won’t do much, if any, harm to the whole muni market.
And although I’d expect a few more defaults this year, the numbers will still be miniscule – perhaps 0.5%-1% of the total municipal bond market. But many of the muni bonds are priced as if they’re expecting 10%-14% default rates.
To put that into perspective, in 2011, defaults totaled $2.8 billion… less than 1% of the total market. So even if defaults doubled (to $5.6 billion), that is still less than 1% of the market… and a long way away from 10%-14% the talking heads are yelling about.
Plus, even with defaults, the deals are worked out, sometimes people still get new terms that provide 80 to 90 cents on the original dollars.
Don’t let the graft and corruption of California’s ugliest city scare you out of a great investment…
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
P.S. In April, I told DailyWealth readers about one of my favorite picks — the Invesco Insured Municipal Income Trust (IIM). It fell 13% when the credit-rating agency Moody’s said the default rate for municipal bonds has doubled in the past two years relative to the average default rate from 1970 to 2009. The ratings agency also said it expects more local governments to default on bond payments.
At the time, I said this was a great opportunity to get into munis. And since then, IIM has risen almost 10%… in just three months. However, right now, IIM is trading at about a 4% premium to its net asset value (NAV). I don’t like to buy closed-end funds at more than their NAV, and IIM is getting ahead of itself. But I do have another muni fund in my portfolio that yields nearly 9% on a taxable equivalent basis. Plus, it’s trading at exactly its NAV. I recently told my Retirement Millionaire subscribers this is a “strong buy”… and I expect this bond to pay us 5%-6% a year in tax-free income for the next several years.
In addition to earning a 9% yield (on a taxable basis) with muni bonds, there are a handful of unconventional income opportunities available right now investors should know about. These opportunities could result in hundreds or even thousands of dollars in extra monthly income for retirees. But some large institutions have worked very hard to prevent you from knowing about them. If you’d like to review the facts for yourself — and learn more about Retirement Millionaire — click here.
Source: Daily Wealth