Government borrows too much and pays too much to borrow
money, because government always pays too much for everything they buy, because
it isn’t their money and they want to be generous to their campaign
contributors.
Now if you want some of your SPLOST sales tax money back,
look at municipal bonds explained in the article below. Norb Leahy
What are municipal bonds? By Dr. David Eifrig, 10/15/15
Municipal bonds or "munis" are loans that
investors make to cities and states to build roads, schools, or other public
buildings. For example toll roads in California, water distribution in Texas,
and maintenance of the New Jersey Turnpike.
In return, the government promises to send investors regular
interest payments, plus return the initial investment, called the
"principal," at the end of a set period of time.
How much do munis pay you?
Right now, muni bond funds are yielding about 5.5%. That
seems pretty good at a time when savings accounts yield less than 1%. But the
income is even better than it looks.
As an incentive to get folks to loan their money to cities
and states, the income you earn from muni bonds is exempt from federal taxes.
If you’re in the 28% tax bracket, that makes a 5.5% yield the equivalent to a
7% taxable yield.
How often do you get paid?
Many municipal-bond funds are structured to pay out interest
monthly perfect for retirees who are looking for a safe, dependable income
stream. Most muni funds have paid out like clockwork since they were
established every single month.
Are these bonds safe for your portfolio?
Muni bonds are incredibly safe. Most are backed by the full
taxing power of the issuing municipality. If money runs short, the city or
state can raise taxes and pay off its bills. That’s what makes munis so safe.
From 1970 to 2013, an investment-grade municipal bond had a
0.08% chance of defaulting over 10 years. During that same period, junk bonds
had about a 3% chance of defaulting over 10 years.
What’s the worst-case scenario if everything falls apart?
We don’t have to look far to find a prime example of nearly
everything going wrong for muni-bond holders. In 2013, Detroit was a true
nightmare scenario for muni bonds. The city had more than $20 million in debt
that raising taxes wouldn’t fix. After making deals with creditors, Detroit was
able to exit bankruptcy in December 2014.
But even in this worst-case scenario, being a Detroit
bondholder wasn’t all that bad. If you held what were known as "unlimited-tax
general-obligation" bonds basically the all-purpose Detroit bonds you
collected $0.74 on the dollar in the final settlement.
So in the absolute worst-case scenario, most bondholders
took just a 26% loss on face value. And remember, these bondholders also
collected interest payments during the time leading up to the city’s default.
What if the Fed hikes interest rates?
Investors think that the Federal Reserve will raise its
benchmark interest rate sometime this fall or early next year. Whenever that
rate goes up, it will make other investments look less attractive in
comparison.
Rates and prices move in opposite directions. If a bond pays
3% and rates rise to 5%, the price of the bond declines because investors can
easily find higher-yielding investments than the original 3% bond.
But as far as we can calculate, most of the potential for
higher rates has already been "priced in" to muni-bond prices.
Are muni bonds a good choice for you?
If you own mostly stocks, then buying bonds will help balance
out some of the ups and downs of your portfolio. The prices of muni bonds
usually move independently from stocks. And their consistent history of paying
steady dividends can help you sleep at night.
But like all assets, you want to buy muni bonds at a good
price.
When should you buy muni bonds?
Right now, muni bonds are trading cheap near the depths of
where they traded during the global financial crisis. And if you watch the
headlines or, better yet, are a subscriber of my Income Intelligence advisory
service you can use "headline risk" to figure out an even better time
to buy.
If you see a big drop and scary headlines, it probably means
a lot of investors are overreacting to a single event like Detroit, Puerto Rico
(which defaulted on $58 million in debt in August), or a liquidity crisis.
Where should you put muni bonds when you buy them?
Because most muni bonds are tax-advantaged that is, you don’t
have to pay taxes on some or all of the distributions that they pay out it
makes more sense to hold them in a regular, taxable brokerage account instead
of your 401(k) or IRA.
Why won’t a junk-bond crisis hurt muni bonds?
Muni bonds may have rocky ups and downs in the near future,
but I don’t expect the same liquidity problems in munis that are likely in
corporate bonds.
I’ve been telling readers to buy municipal bonds for a long
time. I even went on national TV to make my case. Municipal bonds have been and
will continue to be a great deal for income-seeking investors. Dr. David Eifrig
Source: Daily Wealth, stansberryresearch.com
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