Municipal Bonds Outshine Dividend Stocks in Tax-Free Yields

Municipal bonds and dividend stocks are both popular choices for income investors, but which one actually keeps more of your money? The answer lies in your tax bracket.

A recent analysis compared the performance of the iShares National Muni Bond ETF (MUB) with three reliable income stocks: Procter & Gamble (PG), Coca-Cola (KO), and Johnson & Johnson (JNJ).

The study found that municipal bonds, particularly those backed by general obligation bonds, offer a higher tax-free yield than these dividend stocks. For example, the iShares National Muni Bond ETF has a trailing distribution yield of 3.38%, which is federally tax-exempt in most cases.

However, this advantage comes with some caveats. Municipal bond holders face risks such as default, call risk, and interest rate risk. On the other hand, dividend stocks can grow over time, but they come with their own set of risks, including dividend cuts and earnings volatility.