Reduced-Price Municipal Bonds to Lower Your Tax Obligations
In the current economic climate, investors seeking income opportunities beyond the stock market may find solace in municipal bond closed-end funds (CEFs). These funds, such as the Nuveen Municipal Credit Opportunities Fund (NMCO/XNMCX) and the Nuveen New Jersey Municipal Bond Fund (NMNJX/NNJAX/NJCCX), offer high dividends that are tax-free, making them attractive for tax-sensitive investors.
The Nuveen Municipal Credit Opportunities Fund focuses on high-yield, low- to medium-quality municipal bonds. It uses leverage to enhance returns and targets tax-exempt income while balancing credit risk. The fund seeks a high level of current income exempt from federal taxes, making it an appealing option for those looking to reduce their tax burden.
On the other hand, the Nuveen New Jersey Municipal Bond Fund invests primarily in investment-grade municipal bonds to deliver current interest income exempt from federal, state (New Jersey), and in some cases local taxes. It prioritizes capital preservation while providing a tax-advantaged income stream, making it suitable for investors seeking a high level of tax-free income from quality municipal bonds.
While other funds like Guggenheim's taxable municipal bond fund exist, they either do not provide tax-free income or have a broader investment mandate without specific state tax exemptions. For high tax-free dividends, these Nuveen municipal bond funds stand out due to their focus on tax-exempt income and relatively high distribution rates versus quality and risk balance.
Another CEF to consider is the Invesco California Value Municipal Income Trust (VCV), which yields 7.5%, higher than the iShares National Muni Bond ETF (MUB). VCV has outperformed MUB since its inception, providing a more attractive return for investors.
For a national choice with a bigger dividend, consider the 8%-yielding RiverNorth Managed Duration Municipal Income Fund II (RMMZ). RMMZ's discount is currently 7.9%, trending narrower, putting upward pressure on the share price. RMMZ's payout tops those of both MUB and VCV.
Investing in municipal bonds through a CEF allows investors to net a much bigger payout compared to individual munis, which are tough for everyday investors to access. Moreover, a human manager is preferred for muni bonds because they can provide insights when the best new bonds are issued.
In a year where the S&P 500 has returned around 10%, but the iShares National Muni Bond ETF (MUB) is flat, these high-yield municipal bond CEFs offer a promising alternative for income-seeking investors. With lower interest rates anticipated, the attention on tax-free muni-bond CEFs like RMMZ is likely to grow, making them an attractive option for the long-term.
For California residents in the top tax bracket, a 5%-yielding muni bond is worth an 8.2% yield on a US Treasury, or 10% from other debt instruments like corporate bonds. Therefore, these high-yield municipal bond CEFs could provide significant tax advantages for California residents.
In conclusion, for investors seeking income opportunities beyond the stock market, municipal bond closed-end funds like the Nuveen Municipal Credit Opportunities Fund, the Nuveen New Jersey Municipal Bond Fund, and the RiverNorth Managed Duration Municipal Income Fund II offer high dividends that are tax-free, making them an attractive option for tax-sensitive investors.
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