This Tax “Loophole” Boosts Your Dividends to 9.5%

Still feeling the taxman’s sting from April? Then you probably need to consider getting some tax-free income.

Having an income stream the IRS can’t touch may sound like pie in the sky, but it’s a reality if you hold municipal bonds. That’s because the tax code provides an exclusion for these bonds, allowing most US investors to collect interest payments from them tax-free. And in many states, income from those bonds is exempt from state taxes, as well.

If you aren’t intrigued yet, then let me show you some numbers—and what they could mean to your portfolio.

If you’re in the highest tax bracket (37%) and you get a 6%-yielding municipal-bond fund, that income is the exact same as a 9.5% dividend from stocks. And municipal bonds are nowhere near as volatile as high-yield stocks. Just compare the volatility of the iShares National Muni Bond ETF (MUB) and the Vanguard High Dividend Yield ETF (VYM):

A Smoother Ride Makes Withdrawals Easier

Not only does this lower volatility give you peace of mind, but it also makes withdrawing from your principal easier in cases of emergency.

There’s just one problem—MUB yields a paltry 2.4%!

But have no fear—I’m going to show you 3 closed-end funds (CEFs) that yield far more than that and are still tax-free. Before I get to them, though, let me tell you why you should choose these funds, and why now is the time to jump in.

Why Muni CEFs—and Why Now

One of the biggest benefits of closed-end funds is how inefficient they are. It sounds crazy, but CEFs cater to retail investors, who often just don’t know how far apart these funds’ market prices are from their their net asset values (NAVs), resulting in big discounts for a lot of CEFs.

In fact, the average CEF now trades at a 6.3% discount to its NAV—which is near the biggest average discount over the last year.

But some CEFs are more heavily discounted than others, while some actually trade at a premium—or for more than what their portfolios are worth. That risk of overpaying is why you can’t just choose any CEF.

The most interesting trend in CEFs over the last few months has been the shrinking discount to NAV among equity funds and the growing discount among bond funds—but nowhere is the discount bigger than among municipal-bond funds. Take a look:

Big Discounts in Muni Funds Create Buying Opportunities

Source: CEF Insider

With the average discount among muni-bond CEFs at 8.6% (which is near double the 5.3% average discount of just a year ago, by the way), these funds offer us an incredible buying opportunity right now.

And while a few discounts in US-stock CEFs are still there, the recovering market that I predicted back in April means that the oversold equity funds I showed you back then aren’t so cheap anymore, so we need to get a bit creative.

Which is why muni-bond funds are the “it” thing to buy right now.

For one, with their unusually large discounts, muni funds are finding it easier to sustain their dividend payments, providing us with a safer income stream. Also, despite popular belief, municipal bonds do not go down during periods of rising interest rates.

In fact, this “rates up, muni bonds down” myth is a big driver of why muni-bond CEFs are so cheap now, again giving contrarians like us an opportunity to get tax-free income at a heavy discount.

Don’t believe me? Take a look at this chart from the mid-2000s, when the Federal Reserve increased interest rates by over 400%:

Interest Rates Rise—and so Do Muni Bonds

That blue line is the Invesco Municipal Opportunity Trust (VMO), the first pick I want to show you today. It’s a 5.7% yielder full of tax-free muni bonds that went up a full 17% during the last sustained rate-hike cycle.

And it’s unusually cheap now: its 10.8% discount to NAV is massive on its own, but it’s even more attractive when you consider that VMO’s discount has averaged just 2.3% in the last decade.

On top of that, VMO is managed by Invesco, one of the world’s biggest fund companies, with over $950 billion in assets under management (AUM). So you can count on this fund being reliable and secure.

Additionally, VMO has a long history. It’s been around since the early ’90s and has delivered consistently strong results since then—surviving the dot-com bubble bursting, the subprime mortgage crisis and all the drama in between:

A Steady Long-Term Performer

Which brings me to my second big yielder worth considering: the PIMCO NY Municipal Income III Fund (PYN), a 5.9% payer managed by one of the most respected names in the bond world: PIMCO, with $1.8 trillion in assets under management—more than the GDP of several small countries!

PIMCO built those assets through outperformance, which is why most of the company’s CEFs tend to trade at premiums to NAV.

PYN, however, is different. With a 2.6% discount to NAV, this fund is trading for less than the value of the assets in its portfolio—something it hasn’t done since 2009! And there’s no reason for it to trade so cheap, since PYN has doubled the return of its benchmark, MUB, since the Federal Reserve started raising interest rates in late 2015:

A Huge Overachiever

With such a track record, expect this one to trade at a premium to NAV soon. But there’s one other thing that makes PYN attractive: its size, or lack thereof.

Because PYN has just $51 million in AUM, it’s simply too small for a lot of large institutional investors—and that small size means that it’s incredibly inefficient, even by CEF standards. That’s why this fund typically has traded for a premium to NAV for most of the last decade, making its recent discount that much more appealing.

The last fund I want to show you is the BlackRock Municipal Income Investment Trust (BBF), which commands attention thanks to its 6.1% yield.

But that’s not the best thing about this fund. Like PYN, BBF is really small, with just $142.2 million in AUM, which is about a quarter of the size of most muni CEFs. And that small size results in mispricings that don’t reflect its stellar track record.

Another Big Winner

As you can see, the BlackRock Municipal Income Investment Trust has beaten the index for a very long time (this chart just covers five years, but since the fund’s inception in 2007, BBF has returned 79.3% versus MUB’s 50% over the same period).

I may be burying the lead here, though; the really nice thing about BBF is its manager: BlackRock, the largest investment firm in the world, with a staggering $6.3 trillion in assets under management. That means it has the connections to get the best municipal bonds as soon as they go IPO, the best minds and technology to analyze those municipal bonds and the best market position to trade those bonds most profitably.

Is this corporate heft priced in to BBF? Hardly. It’s trading at a massive 7.4% discount to NAV, after trading at a premium for most of the last three years:

BBF Suddenly Very Cheap

Should we expect this premium to NAV to come back? The short answer is yes. The discount only showed up—and steepened—in the last few months due to the market panic of the last few months.

But the market is getting more comfortable, which will likely result in BBF returning to its normal high price—giving those of us who buy today some tidy capital gains on top of that massive 6.1% income stream.

This CEF Doubled the Market and Pays 7.8% in Cash!

There’s no doubt that in a few months we’ll look back at the selloff in muni bonds and recognize it for the terrific buying opportunity it was. So don’t miss your chance to lock in the safe, tax-free payouts muni-bond funds offer now—while you can still get them cheap.

Here’s something else you should know: “munis” aren’t the only assets to be hit by the silly (and wrong) investor myth that rising rates are a bad-news story.

Another? High-yield real estate investment trusts (REITs).

And just as I showed you with VMO above, REITs also do great when rates head higher—contrary to what most folks believe.

Check out how the benchmark REIT ETF, the Vanguard REIT ETF (VNQ) did in the last sustained rising-rate period:

Rates Rise, REITs Surge

That makes now a terrific time to buy this unloved asset class, too. But just as we did with muni-bond funds, we’re going to take a pass on the popular REIT ETF and go with my top CEF pick in the sector.


For one, my No. 1 REIT CEF pick fund hands us an outsized 7.8% CASH dividend today. And talk about stable: it not only survived the financial crisis, it rebounded far more quickly than the market and has gone on to hand investors far bigger gains since.

An All-Star Management Team in Action

And keep in mind that this fund posted these incredible returns while investing in real estate: the very thing that caused the collapse in the first place!

Think about that for a moment.

This fund not only more than DOUBLED the market’s gain—even when you factor in the Great Recession and the subprime mortgage crisis—but its incredible management team did it while paying a rock-solid 7%+ dividend the whole time!

If this isn’t a fund worth paying a premium for, I don’t know what is. But thanks to the wacky mispricings in CEF land, this one’s trading at an absurd discount to NAV today.

Once the herd catches on to what it’s missing, this fund could easily blow into premium territory.

How do I know? Because it’s happened many times in the past—and when it does again, we’ll easily be sitting on an easy 20% gain, on top of this fund’s juicy 7.8% dividend payout.

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Source: Contrarian Outlook 

Sell These Drug Retailers About to Get Amazoned

There has been no company like (Nasdaq: AMZN) ever with the ability to affect entire industries just by announcing its entry.

The most recent example of this was in late June when Amazon announced a roughly $1 billion acquisition of PillPack, a mail-order pharmacy that packages pills into daily portions before shipping them to patients in 49 states.

PillPack was backed by several well-known investors including Silicon Valley venture capital firms Accel and Menlo Ventures. Its target market is people with chronic illnesses or multiple conditions who take several different tablets every day, rather than people who take a single medication or use prescription drugs only occasionally.

Amazon already captures more than $4 out of every $10 spent online in the U.S. So in response to its PillPack announcement, about $14 billion magically disappeared from the stock market valuations of the biggest players in the U.S. drug distribution and retailing. Shares in those six companies – Walgreens Boots Alliance (Nasdaq: WBA)CVS Health (NYSE:CVS)Express Scripts Holding (Nasdaq: ESRX)Cardinal Health (NYSE: CAH)McKesson (NYSE: MCK) and AmerisourceBergen (NYSE: ABC) had already been depressed last year when Amazon hinted that it was coming into their territory. Proof positive trimmed their values by as much as 10%.

Related: Sell These Stocks As Amazon’s Doctor Will Soon Bring Back House Calls

Already the fear of Amazon’s entry into the sector had started a frenzy of consolidation in the sector including CVS agreeing to acquire health insurer Aetna for $69 billion in December, and in March Cigna, a rival health insurer, agreed to pay $67 billion for the aforementioned Express Scripts, a pharmacy benefits manager that also delivers medication by mail.

Amazon’s Long Game

There is one characteristic I’ve always liked about Jeff Bezos and Amazon – its planning for the long-term. This is so unlike most U.S. companies that are focused on the very short-term.

The PillPack purchase looks like a crucial part of a strategy that Amazon has been slowly building brick by brick, and likely just one step of many in the sector it has long eyed.

Its interest goes back to 1999 when it bought a minority stake in, but never fully integrated it into its core retail offering. Walgreens later bought the website and eventually shut it down in 2016. More recently, Amazon has pursued pharmacy licenses in several US states, held meetings with healthcare industry executives and made several senior hires from insurers and pharmacy benefits managers. And of course, it also recently joined with JPMorgan Chase and Berkshire Hathaway to create a not-for-profit healthcare company that aims to reduce bills for their employees and “potentially all Americans”.

In buying PillPack, Amazon is sticking with the same game plan it is following in the grocery business and its Whole Foods purchase. That is, acquire a company with an existing footprint in a market rather than trying to build a brand new business within its existing retail network. With this purchase, Amazon buys regulatory permits and contracts with health insurers.

While mail order deliveries represent a small proportion of the overall prescription market, it is seen as a source of growth due to demographics – an aging U.S. population will require higher levels of medical care in coming years.

The acquisition should create another competitive advantage for Amazon over others in the space thanks to its extensive logistics network and loyal customer base to its Prime subscription (with 100 million subscribers) delivery service. Amazon may bundle its prescriptions with other products where people make regular, frequent purchases, such as groceries. That could help attract even more Prime subscribers, who spend more and order more frequently from Amazon than non-Prime customers.

Related: Sell These Healthcare Middlemen About to Get Amazoned

But it will not be an easy road for Amazon. That’s because the trend in the pharmacy business is going in the opposite direction of other retail businesses. Last year, about 88% of prescriptions filled were collected at brick-and-mortar pharmacies. That compares to 82% in 2009, according to Goldman Sachs.

As to why this is happening, it’s simple. . .existing mail-order pharmacies stink. For example, with Express Scripts it can take eight days to have a prescription filled and up to two weeks for a new prescription to be filled. Obviously, Amazon is hoping its strength in logistics will shorten those times greatly.

But its logistics won’t help with another problem – about 30% of prescriptions result in a “pharmacy callback”. That is when the medicine prescribed to a patient is not covered by their insurance and the pharmacy then has to contact the doctor’s office to see if a cheaper alternative is acceptable. Perhaps that is why Amazon is pursuing the insurance angle with JPMorgan and Berkshire Hathaway.

Investment Implications

This move into the drugstore space looks to be another win for Amazon. And a loss for the drug distributors and especially the retail drugstores. After all, Amazon is already undercutting them on the prices for non-prescription medicines.

According to Jeffries Group, median prices for over-the-counter, private-brand medicine sold by Walgreens Boots Alliance and CVS Health were about 20% higher than Basic Care, the over-the-counter drug line sold exclusively by Amazon. Amazon began selling the Basic Care line last August with roughly 35 products and has since expanded its range to 65 medicines including mild painkillers, cold and flu medication, sleeping aids and other medication commonly found in the pharmacy aisle. Many of these meds are available through Amazon Prime.

Take all of these moves by Amazon into the distribution of medicines and you have one more reason to sell the drug retailers or, if you’re an aggressive trader, short them.


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