Investing in municipal bonds, or “munis,” can be a great way to profit from political turmoil like the recent debt-ceiling fiasco in the US. Municipal bonds are issued by state and local governments to finance infrastructure projects and offer a stable investment option. Additionally, munis have historically performed well during times of political tension, as was evident in 2011. That year, while the debt-ceiling drama was ongoing, munis surged by 9%–a significant gain for this asset class.
If you invest in municipal bonds through a closed-end fund (CEF), you can potentially get yields that triple the average 2.2% yield of the benchmark iShares National Muni Bond ETF (MUB). CEFs like the high-yielding municipal bond funds covered in this article can provide investors with a steady tax-free income.
Munis are tax-exempt, which makes them even more attractive for most Americans. For example, a taxpayer in the highest tax bracket could earn a taxable-equivalent yield of 9.4% from the 5.5% paying Nuveen Municipal Credit Opportunities Fund (NMCO).
Three high-yielding municipal bond CEFs that are ideal for investors seeking tax-free income are NMCO, RiverNorth Flexible Municipal Income Fund II (RFMZ), and Nuveen Dynamic Municipal Opportunities Fund (NDMO). Each bond fund boasts an average yield of 6.8%, and the dividends are paid monthly. Furthermore, the default rate for municipal bonds is historically very low, making this kind of investment comparatively safe.
The discounts on these bonds are currently attractive and provide investors with the potential for price appreciation. Investors can expect to enjoy both short-term gains and long-term growth from these bonds.
Investors seeking a diversified income portfolio can combine these high-yielding municipal bond CEFs with other monthly-paying CEFs to enhance their returns even further.