It’s time to consider muni bonds.

Municipal bonds, or muni bonds as they’re commonly called, are issued by state, city or local governments to raise capital for public projects like building a highway, sewer, or what have you. The income produced by these utilities is then used to pay out the interest payments to investors.

However, unlike US Treasuries, muni bonds aren’t backed by the Federal government. Because of this, their yields are tax-free—meaning there’s no Federal or State income tax on their payouts. So you can pick up 5%, 6%, even 7% a year without paying a dime in taxes.

And don’t let the lack of federal backing worry you. Muni bonds are extremely safe.
Of the 400,000 muni bonds issued since 1940 only 0.5% have defaulted. That’s one fourth the default rate of corporate bonds—bonds issued by US corporations. Put another way, muni bond are four times less likely to default that their corporate counterparts.

In addition, Muni bonds have outperformed both Treasuries and corporate bonds over the last ten years. A $10,000 investment in muni bonds in 1995 would be worth nearly $20,000 today. That’s roughly a 9% average annual return—the average rate of return for stocks… in tax-free bonds!

Which brings us to today.

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