I am obsessed with the idea of passive income, the thought that I could make money while sleeping truly excites me (does that make me weird? probably). Well today I came accross a great article on the Wall Street Journal Personal Finance Site by Brett Arends titled, “High-Yield Muni Bonds: Time to Strike?”
Mr. Arends provides us with a great, every day definition of High-Yield Munis,
High-yield munis might be issued by non-governmental entities, such as hospitals or nursing homes. Some are issued by private for-profit businesses, which may use the money for pollution control or industrial development. Some are issued by charter schools or private colleges. Overall, high yield munis make up a small percentage of the giant muni market.
The issuers of these bonds get municipal tax exemptions, thanks to various aspects of the tax code. That’s why these bonds are considered municipal bonds.
While they are historically riskier than regular munis they are considerably less riskier than normal high yield corporate bonds. As Mr. Arends points out returns vary greatly…he points to 3 funds Barclays returning a little over 10%, PIMCO returning a little over 8% and Vanguard which is returning over 5%.
It should be noted that most of these bonds are federal income tax free (some might hit AMT) and so 10% is really like 13% to 15% depending on your tax rate! Dinkytown has a great calculator which does the math for you.
With all that being said…do not think we are talking risk free! This is in my opinion the only shortfall of the article; Mr. Arends doesn’t do enough to point out the current trouble. Everyday there are news stories about how states and counties are having REAL trouble keeping up with their debts. Want another example? Check Out LA; even a colleague of Mr. Arends at WSJ wrote an article on the risk subject of muni bonds a week prior.
With all this said – I won’t get to pursue this line of investing UNTIL THE STUPID CONSUMER DEBT IS PAID OFF!
I’ll stay away from munis until Obama backs the state governments with Federal loans… perhaps through TARP. Only then will a suitable backstop set a psychological and financial backstop.
Plus, hasn’t the bargain hunters already pushed the prices back up to pre-crash levels?
Matt,
1) With or Without Obama backing State gov’ts the bonds discussed are likely to be safer than your run of the mill blue chip.
2) I am not sure if the price has been driven up that much because right now I am in debt attack mode vs investing mode