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Building recurring monthly income via Tax Free Muni Bonds

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Money Talk > Investing, Stocks and Bonds

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MoneyMaker2016
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Originally posted by oldguy
I recall one called Farmland Security. Kansas, in early 1990's. The holders were without their money for a couple years, but I think they got 75% or 80% back. I'm sure there are 100's of examples, but I don't follow them.


This is really my point and I think speaks to the core of the risk being "theory". You (and many others frankly) couldn't produce real life examples (or more than one). I think Detroit defaulted? But guess what, our government gave them free money and everything is gravy (for investors). I spoke to both funds, Nuveen and Pioneer, and historically less than 1% have defaulted and those that did produced 90%+ on the dollar. On the PIMAX, not a single default since 2013. Otherwise, less than 1% and all recovered that did.

I understand its possible but highly improbable that a) a significant # of bonds in the fund will default and b) that over time and through bankruptcy etc,... the defaulted bonds will only produce a few cents on the dollars (usually 70-99% are returned) and c) that these cities /obligations will default (less than 1% chance according to my research).

So yes, the higher yield is due to higher risk but historically there haven't been any significant problems. Buy and hold investors won overall.

quote:
What "would" have given me a better return over 16 yrs while also giving me a 4-6% tax free dividend each month?

Don't know about setting up monthly divs,


This is really my goal right now, as I am closing out the cash cow of my life thus far. I need steady income that I can a) reinvest and b) use as startup capital. I am not in a position where I want to buy equities that I can sell for cash when I need it - honestly I don't want to use my own money at all, that's why I love dividends.

quote:
But again, you're chasing "better return" and "low-risk" at the same time - that doesn't happen. It is either/or - if you want safety you need BB grade or better corporate bonds, gov't bonds, 5 yr or less duration - the combined yield/gain is about 2.5%/y to 3.5%/y.


I think historically, these have turned out to be safe, while being perceived as risky. That's my take anyway.

quote:
If you want to dial up the risk level, skip the junk bonds and use a stock index fund, the longterm average return is about 11/yr. You'll pay taxes - but a taxable 11% nets way more than a tax-free 3.7%. Besides - you would be helping with the $17Tril national debt, where's your patriotism? lo]


I keep hearing about the stock index fund. I am looking at SPY, VOO, VFIAX, etc. as potential investments for the future. I think the issue with the 11% I keep hearing about is that it's not a 11% in dividends. Am I correct in that? That's "total" return?
Post Sun Mar 27, 2016 3:45 pm
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oldguy
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I keep hearing about the stock index fund. I am looking at SPY, VOO, VFIAX, etc. as potential investments for the future. I think the issue with the 11% I keep hearing about is that it's not a 11% in dividends. Am I correct in that? That's "total" return?


Yes, total return. It breaks down to about 9% capital appreciation, 2% dividend. The 9% is the feature that is favored by owners of Taxable Funds, ie the fund grows tax-deferred, very small annual tax bite (on the 2%).
Post Sun Mar 27, 2016 4:23 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
I keep hearing about the stock index fund. I am looking at SPY, VOO, VFIAX, etc. as potential investments for the future. I think the issue with the 11% I keep hearing about is that it's not a 11% in dividends. Am I correct in that? That's "total" return?


Yes, total return. It breaks down to about 9% capital appreciation, 2% dividend. The 9% is the feature that is favored by owners of Taxable Funds, ie the fund grows tax-deferred, very small annual tax bite (on the 2%).


So for someone in my position, needing at least 5% tax free dividends, the S&P alone won't be a solution, agreed?
Post Mon Mar 28, 2016 2:28 pm
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oldguy
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So for someone in my position, needing at least 5% tax free dividends, the S&P alone won't be a solution, agreed?


You appear to be getting wrapped around the axle with "tax-free"? And that limits your world to muni bonds only - and leads to chasing div rates - which leads you to junk bonds. Use the term "net" - eg, if your marginal tax rate is 25%, then the 'net' from a 6.666% fund is 5%.

You'll often find taxable bonds and muni bonds of the same quality where the 'net' from the taxable bond is higher than the corresponding muni. (You can look up the quality level of bonds on Morningside, AAA, AA, A, and so on.

quote:
A high-yield bond is a high paying bond with a lower credit rating than investment-grade corporate bonds, Treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds.

Based on the two main credit rating agencies, high-yield bonds carry a rating below 'BBB' from S&P, and below 'Baa' from Moody's. Bonds with ratings at or above these levels are considered investment grade. Credit ratings can be as low as 'D' (currently in default), and most bonds with 'C' ratings or lower carry a high risk of default; to compensate for this risk, yields will typically be very high. Also known as "junk bonds".
Post Mon Mar 28, 2016 4:07 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
You appear to be getting wrapped around the axle with "tax-free"? And that limits your world to muni bonds only - and leads to chasing div rates - which leads you to junk bonds.



Can you suggest another investment that will provide a 5%ish net dividend each month?
Post Mon Mar 28, 2016 4:11 pm
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MoneyMaker2016
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Originally posted by oldguy
They charged you a sales fee, maybe 5% to 8%. And they charged you the difference between discount and retail. And when you sell, both will be repeated.
But the big issue is that they are selling inappropriate products to you, there is no way that you should be in junk bonks, you were looking for income, not a lottery ticket. lol. And as a retailer, the bank should be giving you advice, not putting you into junk.


Confirmed with brokerage. I paid 0 sales fees in front and will pay none in back (purchase and sale)....
Post Mon Mar 28, 2016 4:26 pm
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oldguy
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I paid 0 sales fees in front and will pay none in back


You need to keep peeling back the layers until you learn your costs - obviously the bank doesn't buy/sell bonds for free, (nor should you expect them to), they make their living buying/selling. Hint - you buy at 'retail', you will sell at 'wholesale'. But there is also more to it than that.
Post Mon Mar 28, 2016 6:42 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
I paid 0 sales fees in front and will pay none in back


You need to keep peeling back the layers until you learn your costs - obviously the bank doesn't buy/sell bonds for free, (nor should you expect them to), they make their living buying/selling. Hint - you buy at 'retail', you will sell at 'wholesale'. But there is also more to it than that.


I did. I'm telling you they waived all sales fees in the front and back due to the amount of $$ invested on the initial investment. Trust me, I buy and sell at the public NAV. No retail/wholesale stuff.
Post Mon Mar 28, 2016 7:22 pm
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oldguy
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I'm telling you they waived all sales fees in the front and back due to the amount of $$ invested on the initial investment.


lol, that's why everyone is telling you to stop investing at a bank and go to a fund company. (They really won't tell you the fee??) Your dollar amount is large, relative to daily bank operations - unless this is a tiny local bank?
Post Mon Mar 28, 2016 10:05 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
I'm telling you they waived all sales fees in the front and back due to the amount of $$ invested on the initial investment.


lol, that's why everyone is telling you to stop investing at a bank and go to a fund company. (They really won't tell you the fee??) Your dollar amount is large, relative to daily bank operations - unless this is a tiny local bank?


I think wires are crossed in the technical language being used....

1) I'm investing through citi investments, it's not the bank itself. It's a brokerage.

2) Why do you insist they aren't telling me the fee? If I showed you the purchase info, you could show me this fee?
Post Mon Mar 28, 2016 10:13 pm
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oldguy
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2) Why do you insist they aren't telling me the fee? If I showed you the purchase info, you could show me this fee?


No - if it is hidden and the seller won't tell you where it is, I can't find it either. But it's probably hidden in the bid/ask spread.

lol - isn't there a TV commercial about this lately? A young man and his dad having dinner - and the young man asks about commissions - and dad says that's not the way the world works. And the millennial says "well, the world is changing". Watch for it.
Post Tue Mar 29, 2016 12:39 am
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
2) Why do you insist they aren't telling me the fee? If I showed you the purchase info, you could show me this fee?


No - if it is hidden and the seller won't tell you where it is, I can't find it either. But it's probably hidden in the bid/ask spread.

lol - isn't there a TV commercial about this lately? A young man and his dad having dinner - and the young man asks about commissions - and dad says that's not the way the world works. And the millennial says "well, the world is changing". Watch for it.


What I am trying to tell you is this.

I gave him $100 and the NAV the day they purchased was $20. The sale took place for $100 at the NAV of $20. Of course these aren't the real #'s but the point is there was no spread and nothing hidden. I purchased such a large amount of the fund there was ZERO sales fees but there are fund fees I get billed each month as part of the dividend.
Post Tue Mar 29, 2016 2:34 pm
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oldguy
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I purchased such a large amount of the fund there was ZERO sales fees but there are fund fees I get billed each month as part of the dividend.


Well, I doubt that $200k to $500k investments trigger Citi to make exceptions?

But, no matter how the fee is executed, it is happening - but so what? You may be paying a bit more overhead than you would be if you used a fund company. But your real problem is the product - junk bonds, annuities, etc, are not suited for your goals. Your desire is to own a reliable product that pays a periodic 5% coupon, (monthly or quarterly).

A fund company (Vanguard, Fidelity, etc) will advise you, recommend funds that do what you want, and keep you out of the junk arena. Now, you are taking "uncompensated" risks - buying high-yield, high risk stuff w/o being compensated for the risk.
Risk is good, you need to take the risk that is commensurate with your desired return. But UNCOMPENSATED risk is the worst kind - ie, high risk, no offsetting return.
Post Tue Mar 29, 2016 3:52 pm
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MoneyMaker2016
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quote:
Originally posted by oldguy
quote:
I purchased such a large amount of the fund there was ZERO sales fees but there are fund fees I get billed each month as part of the dividend.


Well, I doubt that $200k to $500k investments trigger Citi to make exceptions?

But, no matter how the fee is executed, it is happening - but so what? You may be paying a bit more overhead than you would be if you used a fund company. But your real problem is the product - junk bonds, annuities, etc, are not suited for your goals. Your desire is to own a reliable product that pays a periodic 5% coupon, (monthly or quarterly).

A fund company (Vanguard, Fidelity, etc) will advise you, recommend funds that do what you want, and keep you out of the junk arena. Now, you are taking "uncompensated" risks - buying high-yield, high risk stuff w/o being compensated for the risk.
Risk is good, you need to take the risk that is commensurate with your desired return. But UNCOMPENSATED risk is the worst kind - ie, high risk, no offsetting return.


1) It was way more than $500k - so imagine a bigger number that you no longer doubt would trigger such an exception. That number is listed on PIMAX/NUVEENS materials on the internet. So you can see, there are zero sales fees in the front/back being paid.

2) Show me another 5% tax free or 7% taxable product that will give me a dividend each month? If you can't find one single product, then I am being fairly compensated for the risk.

I thought I already debunked the argument of uncompensated risk Smile You couldn't show me a single example of the risk being a reality over the last 30 yrs.
Post Tue Mar 29, 2016 3:57 pm
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oldguy
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You couldn't show me a single example of the risk being a reality over the last 30 yrs.


THAT'S your basis? That's hardly conclusive, I didn't actually look, I just checked my recall. You need to do some actual due diligence.

As for another product that pays a 5% coupon - just have a broker do a screen for you. No need to deal in junk bonds to find 5%, my 'no frills' GNMA Bond Fund has returned about 6%/yr since about Y2000.
Post Tue Mar 29, 2016 4:48 pm
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