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Stocks That Pay Tax-Free Dividends - 7931 views
The following commentary comes from an independent investor or market observer as part of TheStreet’s guest contributor program, which is separate from the company’s news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.
SAN FRANCISCO (Stockerblog) -- Here are your choices for income investments:
1. Savings accounts that pay less than half a percent
2. Certificates of deposits that barely pay one percent
3. Regular income stocks that pay dividends that are fully taxable
4. Corporate bonds that pay fully taxable income
5. Treasury bonds and notes that are federally taxable
6. Municipal bonds and muni bond closed-end funds that pay tax free interest with over 120 tax-free CEFs paying in excess of 6%
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Uncertainty in the stock market has been continuing for months. In addition, there is the significant possibility of tax increases. Investors are turning to tax-free closed end funds or CEFs that invest in municipal bonds that pay interest that is exempt from Federal taxes and can be exempt from state taxes if issued in the state you live in. Although these are occasionally referred to as tax-free stocks, they are technically closed-end funds. At WallStreetNewsNetwork.com, we've turned up over 150 of these tax-free CEFs.
Municipal bonds are great for high-tax-bracket taxpayers, as they provide income that is tax free from Federal income taxes, and if the bond is issued from the state in which the taxpayer resides or from one of the territories of the US such as Puerto Rico, Guam, or the Virgin Islands, then the income is also exempt from state taxes. Munis are generally issued by states, counties, cities, and other governmental entities such as school districts, sewer districts, bridges, and water and power departments.
Some of these CEFs have yields of 5% or more, such as the Invesco Municipal Income Opportunities Trust II (OIB), which yields 6.6%, sells at a discount to net asset value, uses almost no leverage, and has a management fee of 0.58%. The CEF has been paying dividends since 1989. Nuveen New York Performance Plus Municipal Fund (NNP) has a goal of providing current income exempt from regular federal and New York State and City income tax. The fund yields 6.0%, trades at a 6.5% discount to NAV, has leverage of 35.58%, and has a management fee of 0.69%.
For California residents, you can consider Neuberger Berman California Intermediate Municipal Fund (NBW), which is exempt from federal and California income taxes. It sports a yield of 5.5% and trades at a very slight discount to NAV. However, it utilizes very high leverage at 41.1% and a management fee of 0.67%.
The municipal bond closed-end funds have numerous advantages. There is no minimum investment. You could technically buy one share. Dividends are paid monthly, so you receive you capital back faster, and you generate quicker compounding of your income. The CEFs are very liquid and traded on major exchanges. The CEFs trade with narrow bid and asked spreads compared to municipal bonds. You can sell off small portions of your CEF holdings if you need funds.
Issues to watch out for include high leverage, high management fees, and CEF's trading at a premium. Also be careful about income that may be subject to alternative minimum tax.
WallStreetNewsNetwork.com just updated its list of tax free income closed end funds, which includes over 175 CEFs, including yields, discounts and premiums, leverage, management fees, date founded, and other information.
At the time of writing, author had no positions in stocks mentioned.
Fred Fuld III, the publisher of stock and bond investing blog Stockerblog and founder of WallStreetNewsNetwork, has been in the financial services industry for over 20 years, working as an investment advisor, options market maker at the Pacific Stock Exchange, vice president of a San Francisco money management firm, university faculty member and wholesaler for the New Alternatives Fund (the first environmentally conscious mutual fund). He is the author of the books Investing in Brazil Stocks and The Green Light on Green Stocks.