For Americans Only... An 8.5% Return On Your Cash

Where’s the best place for your cash now? 

Investments everywhere have been hammered...  It wasn’t this way just a few months ago, but I was seriously worried back then.  In the March 2006 issue of True Wealth, I said:

“I thought I’d never see the day come when U.S. stocks, emerging markets stocks, oil, gold, and real estate are all super-popular... all at the same time.”

I was expecting trouble... and I recommended playing it like this:

“When there’s nothing to buy, the right thing to do is simple... you don’t buy... You accumulate cash.”

Over the weekend, the world’s biggest investor (Bill Gross, who’s responsible for a half-trillion dollars in investment money) recommended the same type of investment I shared with subscribers back in March. 

I’m going to share it with you today.  It’s my favorite place for your cash.  And Bill Gross’ too...

Cash is like any other asset.  When it appears the most worthless – the most hated – it’s probably a good time to accumulate it. Now might be one of those times...

This is not the way most people think.  “I’ve got to put my cash to work,”people say. No, actually, you don’t... Over the last few weeks, having your cash in the bank would have been a lot better than losing it in risky investments.

The most extraordinary place to park cash (or at least a portion of your safe money) right now – particularly if you’re in a high tax bracket – is in tax-free municipal bonds.

For an example of a municipal bond, a city’s toll road might have been financed by one of these.  The bond is paid off through people paying their tolls. The government allows the city to issue special bonds where the bond buyers don’t have to pay taxes on the interest. That allows cities to borrow money at a lower interest rate.

While you can go for the more cash-like shorter-term municipal bonds, I actually like the longest maturities possible. And I don’t mind some leverage, as the opportunity is extraordinary for U.S. taxpayers in the highest tax bracket. Here’s how we’ll get to an 8.5% taxable equivalent yield (as promised)...

Amazingly, we can earn about 4.7% interest in long-term AAA-rated municipal bonds today. That would be the equivalent of earning about 7.25% in taxable bonds at the highest individual tax rate in the U.S.

That gets us up to a taxable yield of over 7%.  That’s good - but how do we get to the 8.5% I promised?

There are literally a few hundred closed-end funds that only own municipal bonds. They trade just like stocks in the U.S. Many of them use a bit of leverage to goose the returns. For example, the ones I’ll show you today pay a tax-free 5.5% (on average), which would be a taxable equivalent yield at the highest tax bracket of over 8%.

From there, many of these closed-end funds trade at significant discounts to the underlying value of their portfolios.  Therefore, we get to pay less than a dollar for every dollar we spend to buy investments paying us in excess of 8% interest (taxable equivalent).

That jacks up our return even more, bringing us to about 8.5%.

Like I said, there are hundreds of municipal bond funds. One company has a few similar closed-end municipal bond funds that use a little leverage and trade at discounts to their underlying values. It’s Van Kampen.

Check out the list of Van Kampen municipal funds here.

If you visit that web page, you’ll find six Tax-Exempt National muni bond funds... all with taxable equivalent yields in the 8.5% range.

There are many of these funds trading at discounts to “Net Asset Value,” and there are some that are exempt from your particular state taxes as well. You can learn more and search for one at the excellent websitewww.etfconnect.com under “Find a Fund.”

One important note:  While a 5.5% stated tax-free dividend is great for Americans in their taxable accounts, it doesn’t excite foreigners (who don’t get the tax break) or Americans looking to do something with their cash in their retirement accounts.  It’s only for your taxable cash.

In sum, municipal bond funds are often paying tax-free dividends in the 5.5% range.  According to Van Kampen, that works out to the equivalent of a taxable dividend of about 8.5% at the highest tax bracket.

In my mind, a safe 8.5% taxable equivalent yield in closed-end municipal bond funds is about as well as you can do on your safe money.  Check ‘em out.

Good investing,

Steve