Where to Find Yields of 6.5% and Higher—Tax-Free - Brief Article

Kiplinger's Personal Finance Magazine, Dec, 1999 by Steven T. Goldberg

In a rotten year for bonds, few types of securities have been hammered harder than leveraged, closed-end municipal-bond funds. The good news: You can now earn 6.5% or better in tax-free income from funds with an average credit quality of AA or better.

Closed-end funds issue a fixed number of shares, which then trade like stock. Right now, many sell at gaping discounts to the value of their underlying assets. The biggest discounts are on funds that used borrowed money to buy more bonds. That helps them when rates remain stable or decline, and hurts them when rates rise, as they have this year. But if rates stabilize, leveraged funds should show fat returns--plus, their discounts will likely shrink or disappear.

Mariana Bush, a closed-end analyst with First Union Securities, warns not to pick a fund solely on its yield. Some funds may be filled with bonds that are about to be called--that is, redeemed by their issuer. Others may be in danger of lowering their dividend. Her choices: Municipal Advantage fund (MAF, New York Stock Exchange, $12; 800-223-2413), which yields 6.8% and is selling at a 11% discount; Van Kampen Advantage Municipal Income II (VKI, American Stock Exchange, $11; 800-341-2929), yielding 6.5% and selling at a 14% discount; and Van Kampen Select Sector Muni Trust (VKL, Amex, $11; 800-341-2929), yielding 6.5% and selling at a 13% discount.

PaineWebber analyst Jon Maier prefers Nuveen Premium Income Municipal (NPI, NYSE, $13; 800-323-5063), which yields 6.7% and sells at an 7.5% discount. He also likes Van Kampen Municipal Opportunity (VMO, NYSE, $14; 800-341-2929), which yields 6.5% and sells at a 13% discount.

Kristoph Rollenhagen of Prudential Securities recommends Nuveen Insured Muni Opportunity (NIO, NYSE, $14; 800-323-5063), which yields 6.8% and sells at a 5% discount. For those who prefer their closed-end munis unleveraged (and therefore less risky), he suggests Nuveen Select Tax-Free Income 3 (NXR, NYSE, $13; 800-323-5063), yielding 6.3% and selling at a 9.6% discount. This fund isn't actively managed and plans to liquidate in 2017.

A final note: If you already own a fund and have a loss, now is the time to sell and buy another fund to gain a tax write-off.