Dividend and Income Investors Forgot About Munis, But Today They Make Perfect Sense

24/7 Wall St. Key Points:

• Rising interest rates have made the tax free payouts on municipal bonds more appealing, particularly for high-income investors in states like California and New York
• Though their exemption from federal (and occasionally state) taxes improves their after-tax returns, muni bonds usually have lower yields than corporate bonds.
• Individual purchases, mutual funds, or ETFs let investors access muni bonds; ETFs have the benefit of real-time trading and liquidity.
• Also: If it’s income you want, don’t forget about the 2 Dividend Legend Stocks that keep paying investors year after year. Click here to learn more.

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Transcript:

[00:00:04] Doug McIntyre: Munis are sort of a forgotten piece of the fixed income investment world. I don’t know. For some reason, I used to hear about them all the time. Why are they making a comeback? What’s what’s the new found interest in that?

[00:00:18] Lee Jackson: Well, number one, the 15 year stretch we had from 2008 to a couple of years ago, there was zero interest rates.

[00:00:28] Lee Jackson: So municipal bonds, for those who aren’t aware, are the bonds that are issued by your local city, your state, your county, to fund activity within the city, state, and county. And it can be for roads. It can be for other infrastructure. It can be for numerous things. But for the last 15 years, the yields on munis, which are lower than corporate bonds, the rate of, you know, triple A, double A bonds are, you know, a good 60 to a hundred basis points lower. So I think they just weren’t attractive from a year, the yield standpoint. But now that we had a big run up from zero to over five, you know, it’s come back in over the last year, I think they’re attractive. And again, if you live in a state like New York or California, there is municipal bond funds that are just California bonds, and those are not subject to state income tax.

[00:01:26] Lee Jackson: And federal income tax. And in some cases, if you live in New York, it’s the same thing. So I think it’s a good idea for people to at least consider it because, they’re tax free. You don’t pay one penny of tax on that income. And again, rates probably won’t go much lower than they are now. I mean they just can’t lower rates tremendously from here because inflation won’t go away and the fed knows that and as much as the president wants rates to be lower. He knows in his in his heart of hearts that they really can’t lower rates drastically So it’s certainly something to consider and you can buy them individually with a single bond that, you know, trades at par, which is usually a thousand initially.

[00:02:11] Lee Jackson: Or you can buy them in a mutual fund from big companies like Fidelity or, or Franklin Templeton. Or you can buy them in an ETF, which is an exchange traded fund, which is a little more helpful simply because you can buy and sell those anytime of day.