You may never have to work again...

One of Doc Eifrig's favorite income investments today: 'The 10% Bond'…

Editor's note: In today's Digest, we featured Dr. David "Doc" Eifrig's overview of municipal ("muni") bonds… Doc has agreed to share with Digest Premium subscribers his favorite way to invest in the sector. It's a recommendation he delivered to readers of the early "beta" test versions of his latest service, Income Intelligence.

 Due to their safety, municipal bonds have yielded an average of 4.9% over the last 10 years, according to the Bond Buyer Index, a longstanding index that tracks the top municipal bonds. But today, thanks to investors' unfounded fears of the bond market, munis pay a 5.2% solid yield... their highest rate in five years.

 Some folks are worried about rising interest rates, which would push down the price of muni bonds. But we've been on record for months now saying that we don't think interest rates are necessarily headed higher. That's giving us an opportunity today.

More telling is that muni bonds yield so much in a low-interest-rate environment. Over the last 10 years, muni bonds have averaged 1.4 percentage points more yield than 10-year U.S. Treasurys. Today, they yield 2.5 percentage points more. (Remember, bond yields rise as prices fall.)

 Municipal-bond prices could fall at some point in the near future (though I doubt it). But either way, I don't really care. Right now, we can lock in a solid yield. Even if we don't get into muni bonds at the precise bottom, we won't sell any time soon... so I don't expect to take a loss on our position.

And as long as we hold onto this [recommendation] for several years, we're likely to end up with a stable investment that pays us plenty of steady income. Plus, muni bonds are a lot less volatile than many other income investments, like mortgage real estate investment trusts or master limited partnerships. Munis hold their value much better.

For instance, the muni-bond market recently posted its fifth-biggest monthly loss in 20 years: -2.8%. Compare that with the stock market... The fifth-biggest monthly loss in the last 20 years in stocks was -9.2%, more than three times greater.

 But for investors like us, buying municipal bonds directly doesn't make much sense.

The brokerage fees are expensive, the transactions are complex, and the minimum investments are high. Plus, sorting through the 1.5 million different bonds further complicates things.

So we're buying a "one click" fund of municipal bonds. We're buying shares of the Invesco Value Municipal Income Trust (NYSE: IIM).

 IIM is a closed-end fund. That means it issues a limited number of shares. It's a publicly traded fund, meaning you can buy it through the market just like any other investment. But there are a finite number of shares available to buy. As a result, the market values of closed-end funds fluctuate. They don't necessarily reflect their net asset value (NAV) – the value of all the bonds it holds.

Sometimes, you'll see closed-end funds trade at a discount to their NAV. When they do, it's a "free money" opportunity. And the bigger the discount to NAV, the more money you can make as the fund returns to a normal valuation. Right now, IIM trades at an 11% discount to NAV. That means you're paying $0.89 cents for $1 of value.

 IIM holds more than 300 different municipal bonds, worth a total of around $844 million. The average bond in its portfolio yields around 4.4%. But because the fund borrows a bit of capital to increase its leverage to buy some bonds on margin, IIM yields 6.7%.

That's standard practice for the muni-bond-fund industry. And IIM borrows less than the average fund.

However, we call IIM "The 10% Bond" because muni bonds are exempt from federal income tax. For an investor in the 33% tax bracket, IIM pays a tax-equivalent yield of 10%.

So we're locking in a 10% annual payment on a diverse collection of super-safe bonds. That's a great deal. Plus, IIM offers great safety, thanks to its portfolio.

According to ratings firm Moody's, just 0.1032% of muni bonds defaulted within 10 years of issue from 1970 to 2006. That's just 10.3 bonds out of every 10,000.

Looking at IIM's portfolio, 75% of its funds are invested in Baa-rated bonds or higher. Of that group, the riskiest ones have just a 0.1349% chance of defaulting in 10 years. Put another way, if you invest $100 into IIM, you can expect the loss from defaults to total $0.13 over 10 years.

That safety – combined with IIM's yield and current discount to NAV – protects us from swings in the bond market.

Action to Take: Buy Invesco Value Municipal Income Trust (NYSE: IIM) up to $15.75.

– Dr. David Eifrig, Jr., MD, MBA

One of Doc Eifrig's favorite income investments today: 'The 10% Bond'…

In today's Digest Premium, we're sharing one of Dr. David "Doc" Eifrig's current favorite income positions… It's a way to collect a safe, double-digit yield.

To continue reading, scroll down or click here.

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 11/05/2013

Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any S&A publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

One of Doc Eifrig's favorite income investments today: 'The 10% Bond'…

In today's Digest Premium, we're sharing one of Dr. David "Doc" Eifrig's current favorite income positions… It's a way to collect a safe, double-digit yield.

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

You may never have to work again... Biotech is having its best year since 1999... A new type of biotech company that has doubled in six months... Two more income vehicles...

 "If you catch just one biotech bull market in your lifetime, you may never have to work again..."

True Wealth editor Steve Sjuggerud has long said the above bit about the biotechnology sector.

Much like the junior resource sector, when a bull market in biotech hits, the stocks don't just double or triple... They can go up 1,000% or more.

 The Nasdaq biotechnology index is up 50% so far this year, more than twice the gains of the S&P 500. That's the best performance for the sector since 1999, when biotechs returned 102%.

Also, 35 biotech companies have gone public this year – the most active year for new listings since 2000.

 One reason biotech stocks are so popular today is their huge upside potential. And in a market where bargains are scarce, investors are looking for upside anywhere they can. (Consider what we wrote about the popularity of initial public offerings in the November 4 Digest.)

Vadim Zlotnikov, chief market strategist at AllianceBernstein, told the Financial Times:

 In February 2012, Steve saw the makings of the next bull market in biotech. He wrote in True Wealth:

 Steve recommended the iShares Nasdaq Biotechnology Fund (IBB) to profit from the trend. And to date, True Wealth readers are up 83% on the recommendation.

 Phase 1 Investor editor Frank Curzio has also been following the biotech trend. In May, he highlighted an unusual way to play the bull market...

One of the drawbacks to biotech investing – which also happens to be the reason for its huge upside potential – is the risk involved. These small companies spend all their capital researching and developing, in some cases, a single drug.

Then, they hope the drug will get approved by the Federal Drug Administration (FDA). The ruling from this government agency can make or break a biotech company... and most experimental drugs never win FDA approval.

Only 22% of drugs over the past five years made it past Phase II studies and on to the final Phase III (let alone won approval), according to research firm Bernstein. There are hundreds of biotech firms in America with numerous drugs in their pipelines. Only 39 drugs received FDA approval in 2012.

 But Frank discovered a different kind of biotech company... He called it "one of the best small-cap biotech companies [he has] ever researched."

Unlike most small-cap biotechs, which focus their efforts on one or two drugs... the company Frank discovered, Ligand Pharmaceuticals, is a biotech royalty company.

 We've often said the royalty business model is one of the best in the world. You may remember us talking about this model when highlighting resource companies like Royal Gold...

Precious-metals royalty companies like Royal Gold have significant advantages over gold and silver producers.

A royalty company will give a miner an upfront payment – a big chunk of cash – to help finance a project. Instead of treating this payment as a loan that will be paid back at a future date, the royalty company gets a percentage stake in the future production of the project.

These royalty agreements benefit mining companies by providing access to the capital needed to pay for exploration and development. In exchange, the royalty company gets a piece of the upside without having to worry about the day-to-day operations and planning. In essence, the royalty company just sits back and collects the gold profits from someone else's mine.

Ligand works the same way, but with drugs rather than gold mines... Instead of putting all of its time and resources behind bringing one drug to market, it has invested in a portfolio of 85 near-term royalty-generating drugs.

Frank recommended Ligand exactly six months ago... And already readers are up more than 100%.

 And Ligand is only getting started. Frank updated subscribers on the company in his most recent Phase 1 issue...

Ligand is a classic Phase 1 recommendation... It was a small, $500 million company and virtually unknown when Frank recommended the stock. The stock had huge upside potential (and still does even after a quick double)... And the downside risk was minimal, due to its business model.

Kudos to Frank and the Phase 1 research team.

 In his latest issue, Frank tells a "David and Goliath" story about two feuding companies. One of the businesses is the largest search-engine company in the world – Google.

The other firm – which is 1/1000th Google's size – took the corporate giant to court over a patent worth hundreds of billions of dollars.

You see, this small company owns a key patent that helps Google generate 97% of its revenue. That's more than $240 billion in sales in the eight years Google has been a publicly traded company.

And it beat Google in court...

 It's an incredible story... And like Ligand, Frank thinks this stock could soar. He says it has the potential to more than triple as its court cases settle.

 In yesterday's Digest, we discussed Dr. David Eifrig's "trading for income" strategy... and how inflation undermines different types of income-producing investments. We also explained why you need to diversify your portfolio to include many different income vehicles.

That way, no matter what happens in the market, you'll have half a dozen different types of income streams. Yesterday, we told you about two income-producing assets.

And as promised, today we're explaining two more assets. We'll divulge the final two assets in tomorrow's Digest.

Municipal Bonds

The Asset: Just like a corporate bond, a municipal bond's asset is a loan. But in this case, it goes to a municipality – either a local or state government.

The historical default rate on municipal bonds is virtually nil. While triple-A-rated corporate bonds (the highest rated) have a cumulative default rate of 0.52% from 1970 to 2006, triple-A-rated municipals have zero defaults. Further down the scale are Baa-rated municipal bonds – which are still considered investment-grade – just 0.13% defaulted. Compare this with corporate bonds, 4.6% of which defaulted.

Critical to the safety of muni-bond investments... municipalities have the power to tax, unlike corporations. Analysts who predicted large numbers of municipal defaults often forget this. You shouldn't think of municipalities and their balance sheets like businesses.

Some municipal bonds are considered "general obligation" bonds, meaning the city owes on the bonds no matter what. In these cases, the true asset is a loan secured by the municipality's power to tax.

Others are "revenue bonds" tied to a specific asset. For example, bonds can be issued to build a new baseball stadium. Then, the revenue the stadium generates goes toward paying off the bonds. These bonds can be considered riskier since bondholders are at the stadium's mercy. But as with all bonds, in case of a default, bondholders would still be able to recoup some of the losses, unlike shareholders in corporations.

The Price: Like corporate bonds, you can find current prices of municipal bonds on FINRA.

The Income: Muni bonds have nearly identical features to corporate bonds. Only one calculation is different... and it's what makes municipal bonds more attractive.

Most municipal bonds are tax-exempt. At a minimum, you don't have to pay federal income tax on the income you receive. And if you hold municipal bonds issued in the state where you live, you don't have to pay state taxes on them, either. That makes munis a great asset for creating wealth...

Imagine you have $1,000 to invest and the choice of a corporate bond or a municipal bond. Let's say the corporate bond pays 6% and the municipal bond pays 5%. It looks like the corporate bond is more attractive. But to correctly compare them, you need to consider the tax implications...

If your tax rate is 28%, the municipal bond actually pays the same as a corporate bond yielding 6.9%. So the muni bond actually offers the higher yield. That 6.9% is called the "tax-equivalent yield."

The formula is municipal yield / (1 – tax rate)... But don't worry, we'll always calculate it for you.

Real Estate Investment Trusts (REITs)

The Asset: REITs invest in real estate and pass the rental income on to shareholders.

REITs are not the same as a company that manages real estate. They have a unique corporate structure designed to more closely simulate a direct investment in real estate. To qualify as a REIT, a company has to fulfill several requirements. For our purposes, two are the most important...

The company must derive 95% of its income from dividends, interest, and property income (rent). And it must pay at least 90% of its income to shareholders as dividends.

In exchange for meeting these requirements, the company doesn't have to pay corporate taxes on most of its earnings.

In this sense, buying shares of a REIT entitles you to virtually the same income as if you were able to buy the properties and hire a property manager... except you get to avoid the headache of operating a property.

To think about REITs, you have to think like a landlord... How are rental rates trending? What's the vacancy rate? Are property prices rising?

REITs come in all shapes and sizes: residential, retail spaces, office spaces, industrial, and campus housing, for instance. REITs also exist in assets that you might not consider real estate at first glance, like mortgage REITs, which hold a portfolio of mortgage-backed securities. As the borrowers who took out these loans pay down their debt, the payments get passed through the REIT back to the shareholders. As you can see, REITs offer a lot of opportunities for investors to turn assets into income.

The Price: REITs are traded just like any stock, so you can find their prices on Yahoo Finance.

You should compare the market cap to the value of the REIT's assets. Traditionally, REITs trade somewhere around two times book value. That means a REIT with $1 billion in real estate assets will often have a market cap of around $2 billion. The difference is due to the fact that the assets can generate income and because the book value – a company's assets minus its liabilities – is usually lower than what the properties could truly be sold for.

The Income: The income from a REIT comes in the form of dividends. Like a stock, this is usually paid on a quarterly basis.

But judging the safety of the income from a REIT is a bit different. Rather than focusing on earnings, a REIT is better judged by its funds from operation (or "FFO"). FFO shows how much money a REIT earns from its rental fees. Over time, we'll teach you more about this important analysis.

 Our financial news and opinion aggregator website, The Daily Crux, is also sharing Doc's best income-investing secrets every day this week. You can read Tuesday's here.

 New 52-week highs (as of 11/5/13): Becton-Dickinson (BDX), BP (BP), CVS Caremark (CVS), Altria Group (MO), Microsoft (MSFT), Sturm, Ruger (RGR), and Constellation Brands (STZ).

 In today's mailbag, some feedback about yesterday's Digest Premium, where Doc Eifrig shares a list of potentially dangerous supplements. You can weigh in at feedback@stansberryresearch.com.

 "I was nothing short of shocked to see that several natural herbs and supplements included on Dr. Eifrig's list of dangerous supplements are some that that I have used on and off for many years. Several years ago I was diagnosed with being HIV positive. I have never received drug treatments. But I have used...

"Chaparral – which helped control inflammation and some epidermal symptoms.

"Even prior to my diagnosis I used colloidal silver daily and I have been for 6-plus years. I have never turned blue. I find I lack energy when not taking it. I never get colds and flu's and haven't since my diagnosis – prior to using the product I often was sick with a cold. It's important to note that the famous "blue man," the poster child for the anti-colloidal silver advocates fail to differentiate between the crude solution he was producing at home and commercially available products. Of course consuming too much of anything is not good, my intake is limited to 1-3 teaspoons daily – any amount more than this has the opposite effect and makes me sluggish and tired.

"Comfrey root – I have taken internally with no negative effects.

"I've used germanium to help control the hiv virus.

"I've had a long history of depression and anxiety, but I refused drug treatments and used several natural supplements to successfully allow me to enjoy life to the fullest – one of them was kava.

"While it's true that any herb, when taken incorrectly has the potential for negative effects, I often see emphasis placed on the harm potential from the natural substances that have been used for millenniums and very little emphasis placed on the potential negative effects of pharmaceutical drugs. How many deaths are attributed to prescription drug use in the USA annually versus natural remedies?

"I have been lucky enough to be able to have very reliable and effective support for my health that has allowed me to live a very full, happy and fulfilled life completely drug-free. My white blood cell count is high. My viral load is low. Depression and anxiety are rarely bothersome. I encourage anyone to seek out alternative therapies. There ARE other safe and effective ways of healing your body than with conventional medicine, but the emphasis needs to be placed on personal responsibility for the information you receive, whether it comes from a medical doctor or from an alternative health practitioner." – Anonymous

Regards,

Sean Goldsmith
Baltimore, Maryland
November 6, 2013

Stansberry & Associates Hall of Fame
(Top 10 all-time, highest-returning closed positions across all S&A portfolios)