There are times when speculators over do it.
This is a great time to take advantage of an investment with low downside and big income potential.
Today's top idea is municipal bonds.
US Cities and States need financing just like corporations and these debt instruments are called municipal bonds (or "munis"). The loans fund education buildings, utility facilities and roads.
The incentive to investors is the income is federal tax free. With a 24% tax bracket, a 5% yield is really like buying other bonds paying 6.6%. You risk is also very low with historical default rates at 0.15%.
An attractive way to own Municipal Bonds is through a "closed end fund." Instead of issuing and withdrawing shares when investors buy and sell like an open fund, closed end funds issue a fixed amount of shares and they trade on the market at a discount or premium to NAV (Net Asset Value).
The best opportunity rises when closed end funds trade at a discount where you can buy a $1 worth of assets for say $0.90.
Take a look at Nuveen AMT-Free Quality Municipal Income Fund (NEA) which is yielding a safe 5%. Right now the fund is trading at a rare almost 12% discount.
This is one of the largest discounts in NEA's history. Investors are currently worried about rising interest rates which will make current bonds less attractive. However, with most expecting higher long term rates it is likely that long term rates stay suppressed or even decline over the next year or so.
NEA currently trades near a 4 year low.
This allows us to take advantage of multiyear price low, a discount to NAV and an attractive yield in today's low interest rate world.
Buy NEA up to $13 with a stop loss at $12.40. It is best to only risk about 4% on this investment given that it is a yield play and not a capital appreciation play.
Happy yield hunting.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.