Last week, I explained why fears about new dividend taxes are overblown. But obviously investors are still worrying because many of my favorite income stocks have gotten cheaper in the last two weeks.
As I’ve said already, I think this is creating a big opportunity for you to get some great long-term buys. And please remember that as prices go down, dividend stocks’ yields only go up!
Of course, the inverse is also true: When investor demand for a particular type of income investment goes up, so do prices … and down go yields.
That’s exactly what we’ve been seeing in municipal bonds — debt offered by states, cities, and other local government entities.
These “safe” investments are currently sporting some of their lowest yields in history because millions of dollars have been flowing into them over the last couple months.
But getting pathetic yields is just the first of many reasons NOT to run into muni bonds right now.
Just Look At What’s Happening in Many of
Our Country’s States and Towns Right Now …
The nation’s fiscal cliff has been getting all of the attention, but plenty of state and local governments are facing crunches of their own.
And they’re now taking unprecedented austerity measures to stave off bankruptcy:
• Scranton, Pennsylvania recently lowered every employee’s salary to minimum wage after they were left with only $5,000 in the city’s bank account.
• New Jersey slashed its budget by 26 percent … fired 1,300 state workers … and is still facing a $10 billion budget deficit.
• Arizona is so desperate, it sold its capital building and leased it back … and canceled Medicaid funding for organ transplants.
• State Comptroller Dan Hynes called Illinois a “deadbeat state” because it has about $5 billion in unpaid bills and no money to pay them.
• And at least 292 school districts across the country have cut the school week down to four days to cut costs … and many plan to cut kindergarten.
All told, state and local governments have cut 680,000 jobs just in the last four years.
That’s just added to existing unemployment woes, slammed real estate values, and further lowered their overall tax bases.
Do these sound like safe places to invest right now? Especially if the money you’re being paid for doing so is extremely low by historical standards?
I sure don’t think so!
So why are millions of new dollars still flowing into muni bonds right now?
Simple: In addition to at least offering some yield, munis also get very preferential tax treatment.
But What Most Investors Don’t Realize
Is That This Last Good Reason to Own Munis
Could Very Well Be Going Away, Too!
CNN Money reports almost 75 percent of municipal bond buyers are invested primarily because of the tax advantages.
This means there is always high demand for munis, even at lower interest rates, because the tax advantages and supposed safety of these bonds make them very attractive compared to things like higher-yield corporate bonds.
But according to Bond Buyer magazine, federal tax exemptions from municipal bonds have cost Washington over $258 billion in missed revenue over the last five years.
That may not seem like a lot when Washington is running trillion-dollar budget deficits, but President Obama is desperate for ANY increase in revenues he can find to fund the Capitol’s spending addiction.
In fact, he has already tried to end the tax exempt status of municipal bonds twice before.
Both times he buried this legislation in larger bills.
The first was in the American Jobs Act of 2011 where he tried to sneak in a 7 percent tax increase on municipal bonds.
Obama then upped the ante in the 284-page Debt Reduction Act of 2011, which would start at a 7 percent tax increase with the potential to totally eliminate the tax exemption if Washington failed to meet its deficit targets.
Both times, his attacks were fought off by bond dealers and state lobbyists.
Now, however, a third attack on the tax exempt status of muni bonds has finally surfaced in Obama’s 2013 budget proposal. And I think he may be successful this time around.
So if you’ve been running to muni bonds for safety, please reconsider. They are looking FAR riskier than dividend stocks right now.
In fact, I’d say this is the perfect time to get rid of any muni bonds and switch INTO dividend stocks.
After all, muni bonds are backed by governments with huge financial woes and are facing huge unknown tax issues. Meanwhile, dividend stocks are supported by private companies sitting on record levels of cash. And if anything, the future tax concerns about dividends are being OVERSTATED.
For more on all of this, I encourage you to watch my latest online presentation.
It has complete details on exactly how to get rid of your muni bonds, and even profit from a future crash in these investments. Plus, it introduces you to some of the dividend stocks that I consider great bargains right now.
Best of all, it won’t cost you a penny to watch. Just click here and it will start playing automatically.