Make 38x What Your Bank Pays You — Tax Free, Every Month

Nicholas Vardy

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It was a solid week for your Dividend Pro portfolio, with most of your positions ending in the plus column.
That’s largely thanks to your three positions in Real Estate Investment Trusts (REITs) — Two Harbors Investment Corp. (TWO), American Capital Agency Corp. (AGNC), and  iShares FTSE NAREIT Mortgage REIT (REM) — all of which continue to do extremely well, both in terms of capital appreciation, and their eye-popping, double-digit percentage yields.
That said, it is important to diversify your stream of income. And one solid way of doing that is by investing in a completely unrelated asset class — municipal bonds.
This week’s Dividend Pro recommendation, PIMCO Municipal Income Fund II (PML), is a closed-end fund managed by Pacific Investment Management Company run by  “Bond King” Bill Gross.
The fund has an annual distribution rate of 6.10% and pays out income on a monthly basis.
But because the fund invests in tax-free municipal bonds, this income is essentially tax free. So, if you’re in the 35% tax bracket, the fund’s yield of 6.10% has a “taxable equivalent yield” of about 9.4%.
Put another way, you’re getting the equivalent of about 0.78% on your money a month — versus about 0.25% per year in your bank account.
That’s almost a 38x difference.
Here’s how PIMCO Municipal Income Fund II (PML) does it.
PML invests primarily in relatively safe, A-rated and double-A rated municipal bonds, variable rate notes, and U.S. treasury bills. The fund then borrows against the portfolio to buy more assets to generate higher yields, thereby leveraging the fund by up to 40%. 
Investing in PML offers a number of advantages over buying municipal funds directly.
First, if you held the actual municipal bonds, then the distributions would only come semi-annually. PML’s monthly distributions are a reliable (and tax-free!) income stream.
Second, by buying the PML, you benefit from diversification which would otherwise be costly to replicate. The last thing you need is to have your nest egg invested in, say, Harrisburg, Pa., which recently declared bankruptcy.
Third, because PML trades on major exchanges and trades like stocks, you can easily exit a position much quicker than if one held a bond.
Finally, you wouldn’t be able to pursue PML’s leveraged strategy by holding individual bonds. Place your sell stop at $11.90 for our new pick, PIMCO Municipal Income Fund II (PML).

Portfolio Update

Hospitality Properties Trust (HPT) was flat this past week. The company announces earnings Aug. 5. HPT is a HOLD.
Global X SuperDividend ETF (SDIV) was off by a hair.  Linked to the Solactive Global SuperDividend Index, this exchange-traded fund (ETF) is an equal-weighted benchmark of 100 companies that rank among the highest yielding securities from around the globe. You received your monthly dividend of 15.8 cents on June 12. This monthly dividend payer remains a HOLD.
Two Harbors Investment Corp. (TWO) rose 0.86%. On June 12, the company’s board of directors declared a quarterly dividend of $0.40 per share of common stock for the second quarter of 2012. This dividend is payable on July 20, 2012, to common stockholders of record at the close of business on June 22, 2012. Flirting with a new, 52-week high, TWO is a BUY.
American Capital Agency Corp. (AGNC) rose 1.46%. American Capital Agency held up remarkably well during the correction and is already trading at a new 52-week high.  AGNC remains a BUY.
Prospect Capital Corporation (PSEC) rose 1.38% last week and is expected to pay a dividend of 10.2 cents per share on June 22. The company will announce earnings on Aug. 26. Trading above its 50-day moving average, PSEC is a BUY.
iShares FTSE NAREIT Mortgage REIT (REM) rose 0.28% during its first week in the portfolio. REM’s top-to-bottom decline was only 4.0% in the recent correction. With a 12-month yield of 11.5% and closing at a six month peak, REM remains a BUY.

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