RETIREMENT MILLIONAIRE

RESEARCH REPORT

Take Advantage of Investment

Opportunities Your Broker
Will Never, Ever
Tell You About

Stansberry &  Associates
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Published by Stansberry & Associates Investment Research.

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Take Advantage of Investment
Opportunities Your Broker
Will Never, Ever Tell You
About
By Dr. David Eifrig Jr., MD, MBA

Wall Street is ripping you off.

Ever heard the last names Mozilo, Fuld, or Thain? These guys were the chief executive officers of
Countrywide Financial, Lehman Brothers, and Merrill Lynch. They all drove their companies into
extinction (or near extinction), while taking out huge paychecks along the way.
Mozilo sold hundreds of million dollars of stock, while driving mortgage lender Countrywide into
oblivion. It lost 85% of its value, while Mozilo sold stock privately and often ahead of company
announcements. The Securities and Exchange Commission (SEC) charged him with insider trading and
securities fraud. But he kept his $110 million severance package regardless.
Lehman’s Dick Fuld sat in front of a congressional committee and blamed “the press” for his investment
bank’s fall to bankruptcy. Oh yeah, did we tell you about the $500 million he’s taken in compensation
since 2000, despite driving the bus off the cliff?
And don’t forget the whiz kid, John Thain of Merrill Lynch. He earned $200 million for working less
than a year. And while Wall Street bank was collapsing, he repeatedly reported everything was fine.
As if that weren’t enough... guys like Mozilo and his family will get free health care for life too, as part of
their severance deals. As if THEY can’t afford health care.
These are stories I’m familiar with more than most…
I spent a decade making hundreds of thousands of dollars on Wall Street. I spent many years working
for one of the most respected (and vilified) firms on Wall Street – Goldman Sachs.
Eventually, the greed of Wall Street led me to retire and go into medicine. (I eventually retired from
medicine as well. But I’m still a board-eligible eye surgeon today.)
I like to expose the secret inner workings of Wall Street and the financial system, which most Americans
would never hear about on their own.
And one thing I know from my time on Wall Street is there are a ton of great investments out there that
you will never hear about from a broker or a money manager.
The truth is that these guys are really just salesmen, and salesmen tend to sell whatever earns them the
highest commissions, regardless of how the actual product performs...
And that’s probably why you have never heard of what I consider the absolute best ways to grow your wealth.

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In this report, I’m going to share with you three of the biggest secret money-making strategies your
broker won’t tell you about.
Let’s start with…

The Easiest Way to Grow Your Wealth

Most people don’t know this... But a corporate “loophole” lets you collect $5,000... $10,000... even
$30,000 or more in extra income... Starting with very little cash.
As you’ll see, some U.S. companies will pay you dividends that grow to five – or even 10 times – bigger
than normal over a period of time.
I’m talking about programs that allow you to reinvest dividends and compound your investment in some
of the strongest businesses in America.
The key to safely building your wealth is to create a safe and growing stream of investment income. The
best way to do that is to invest in a set of American businesses that have reliably distributed income to
investors for many decades. As I’ll show you, in some cases, these investments have been paying out
uninterrupted yearly income for decades. These investments are my favorite super-safe places in the
world right now to put your money.
Even better, what I call our “Dividend Boost” strategy is about more than simply buying stocks with
solid dividends... the critical step is to sign up for a program that allows you to funnel that cash into
more shares of the company... and that allows you to do it cheaply, avoiding big fees and commissions.
Following this program, I can see investors getting at least 35% of dividend income on their initial
cost (so-called “yield to cost”). And I can see their initial investment easily doubling in 10 years. Put in
$1,000 today in this portfolio earning a 3.1% dividend... and you could have $2,000 paying you 17% a
year in 10 years... a great start to retirement.
In this report, I’ll explain how to set up your Dividend Boost program to start receiving a huge, steady
flow of income. But before we get started... you need to understand why...

Dividends Are a Sign of a Good, Shareholder-Friendly Business

One thing you’ll hear me say over and over in Retirement Millionaire: Dividends Don’t Lie...
It’s a cornerstone of our investing strategy. Here’s what I’m talking about: A good accountant can fudge
99% of the figures on a balance sheet or a profit statement. But he can’t fake a cash payment. If a
company is paying cash, it’s hard to fake the numbers.
For example, take Wall Street’s favorite number – earnings. Earnings are subject to all sorts of
bookkeeping adjustments like depreciation, reserve accounting, and different inventory valuations.
Because investors pay attention to earnings more than any other number, it becomes really tempting to
manipulate them.
But think about a dividend. A dividend is a fact. When companies pay their dividends, they mail out
checks to every shareholder. The money leaves the bank and never comes back. It’s that simple.
Regular dividend payments are a real mark of quality. The management and directors know their
company better than anyone else. So when a company announces a dividend payout, it’s saying, “We
have cash we don’t need.” A strong dividend payment almost always indicates a healthy business. The

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company is generating cash and wants to say “thank you” to shareholders.
And a company knows if it takes the dividend away suddenly, its stock will drop. It’s not always easy to
pay out cash to the shareholders every year... Cash is a scarce resource, and it’s critical to every business.
So when companies are able to maintain their dividends through bad times, it sends a strong signal to
the market that management knows what it’s doing... that it has good control of its company’s finances.
Similarly, rising dividends protect stock prices in bear markets. Thus, dividend stocks are by nature
defensive stocks. A rising dividend acts like a pontoon float and prevents the stock price from falling much.
Finally, a dividend payment signals management’s intention to reward investors for offering their capital.
As a stock analyst, I place great weight on the dividend payments when I size up a company. A regular
and increasing dividend payment is a sign of a healthy business.
So the first step in our Dividend Boost plan is to pinpoint the highest-quality dividend-paying stocks...
But the question remains...

How Can I Juice My Dividend Income Stream?

The “Boost” part of our plan is based on a simple – but critical – principle of compounding your income.
It works like this... When the company mails you a dividend check... instead of using it to buy that new
lawnmower or take your spouse out to dinner... you simply buy more shares of the company’s stock...
That’s it... As simple as that sounds, it’s an incredibly powerful tool when you put it to work. Let me
show you just how powerful...
Let’s say you find a stock you like that pays a safe, rich 5% yield. (We’ll use round numbers to keep the
math in this example simple.) You buy 100 shares for $10 each. We’ll assume the share price and the
dividend stay fixed at $10 and 5%, respectively.
At the end of the first year, you’ll receive $50 in dividends (5%). You take that payment and buy five
more shares... This increases your position to 105 shares. In Year 2, you earn $52.50 in dividends. You
reinvest this, too, adding another 5.25 shares to your position.
You now own 110.25 shares. Repeat this process for 12 years and in the 12th year, you’ll make $85.52 in
dividends. That’s an 8.55% dividend yield off your initial $1,000 investment.
Year Share Price Shares Dividend Rate Dividend New Shares Total Shares Value Yield on Cost
1 $10 100 $0.50 $50.00 5 105 $1,050.00 5.00%
2 $10 105 $0.50 $52.50 5.25 110.25 $1,052.50 5.25%
3 $10 110.25 $0.50 $55.13 5.5125 115.763 $1,055.13 5.51%
4 $10 115.763 $0.50 $57.88 5.78813 121.551 $1,057.88 5.79%
5 $10 121.551 $0.50 $60.78 6.07753 127.628 $1,060.78 6.08%
6 $10 127.628 $0.50 $63.81 6.38141 134.01 $1,063.81 6.38%
7 $10 134.01 $0.50 $67.00 6.70048 140.71 $1,067.00 6.70%
8 $10 140.71 $0.50 $70.36 7.0355 147.746 $1,070.36 7.04%
9 $10 147.746 $0.50 $73.87 7.38728 155.133 $1,073.87 7.39%
10 $10 155.133 $0.50 $77.57 7.75664 162.889 $1,077.57 7.76%
11 $10 162.889 $0.50 $81.44 8.14447 171.034 $1,081.44 8.14%
12 $10 171.034 $0.50 $85.52 8.5517 179.586 $1,085.52 8.55%

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This is what accountants call “compound” investing. Your dividends turn into stock. This extra stock
then produces dividends of its own. That dividend becomes stock and so on... Compounding interest
or dividends is one of the strongest ways to build wealth in finance. Warren Buffett built his fortune by
compounding dividends.
But we’re not finished yet... The real magic in compounding happens when you pick stocks that pay larger
dividends each year.
Imagine a dividend that grows 10% each year. Your position compounds at twice the speed. The 5%
dividend yield turns into a 34.2% “yield on-cost” (as it’s called) in the 12th year.
Here’s how...

The Dividend Rate Grows

Year Share Price Shares Dividend Rate Dividend New Shares Total Shares Value Yield
1 $10 100 $0.50 $50.00 5 105 $1,050.00 5.00%
2 $10 105 $0.55 $57.75 5.775 110.775 $1,057.75 5.78%
3 $10 110.775 $0.61 $67.57 6.75728 117.532 $1,067.57 6.76%
4 $10 117.532 $0.67 $78.75 7.87466 125.407 $1,078.75 7.87%
5 $10 125.407 $0.73 $91.55 9.15471 134.562 $1,091.55 9.15%
6 $10 134.562 $0.81 $108.99 10.8995 145.461 $1,108.99 10.90%
7 $10 145.461 $0.89 $129.46 12.946 158.407 $1,129.46 12.95%
8 $10 158.407 $0.97 $153.65 15.3655 173.773 $1,153.65 15.37%
9 $10 173.773 $1.10 $191.15 19.115 192.888 $1,191.15 19.11%
10 $10 192.888 $1.20 $231.47 23.1465 216.034 $1,231.47 23.15%
11 $10 216.034 $1.30 $280.84 28.0844 244.119 $1,280.84 28.08%
12 $10 244.119 $1.40 $341.77 34.1766 278.295 $1,341.77 34.18%

Imagine if you could find a company that increases its dividend by 20% a year. You’d double your money
in Year 8. And your yield on-cost would be more than 39%.
The stocks I’m about to identify are ideal for this kind of investing strategy.
The three companies I’m about to describe have increased their dividend payout every year going back
decades.
Putting an equal amount of money in each of these stocks today will help you to take full control
of your long-term investing... creating a consistent, growing income stream that will build your
wealth safely...
To start... I recommend you buy this...

Dividend Boost Stock No. 1: Medtronic (NYSE: MDT)

In the health care sector, Medtronic (NYSE: MDT) is synonymous with pacemakers. For generations,
Medtronic has been a leader in using electronics to stabilize and manage heart rhythms and maintain
lives. It was one of the first to create an implantable pacemaker that could withstand the giant

4
magnets of an MRI machine.
But the company has grown and diversified. Today, Medtronic gets about 52% of its revenues from its
cardiac and vascular segment and 38% from its restorative therapies segment. The final 10% comes from
its diabetes segment.
Revenues about 5% from 2012-2014.
But what excites me about MDT as a Dividend Boost recommendation pick is that it’s paid a dividend
for 37 years and increased its dividend for 34 consecutive years. A company that keeps growing by
producing cutting-edge technologies and rewarding shareholders is the kind of company we love to own
at Retirement Millionaire.
MDT’s payout ratio is a safe 37%. Earnings (currently around $3.02 per share) could fall in half, and the
dividend would still be safe.
Medtronic currently pays a 2% dividend and trades for less than $65 a share. The dividend has grown
from 34¢ a share to $1.22 over the past 10 years – an increase of over 250%. The five-year growth rate is
about 8.3%.

Dividend Boost No. 2: Pepsico (NYSE: PEP)

A household name, Pepsi (NYSE: PEP) is a global manufacturer and marketer of foods and beverages.
Some of its leading brand names include Quaker Oats, Fritos, and Gatorade. Its CEO is one of the few
female CEOs in the world, a plus in my mind (and research supports better stock performance with
females in power).
Like many of my favorite picks in Retirement Millionaire, PEP grew revenue during the recession.
Sales increased from $43 billion in 2009 to $66 billion in 2013. Profit margins are not as rich as a
technology company, but at 10%, sales growth from an improving overall economy could easily add to
bottom-line profits.
The company is also shareholder-friendly. It has bought back $17 billion in shares the past three years. In
addition, it pays a safe 2.9% dividend at a payout ratio of 51%. Dividends account for another $3 billion of
cash distributed to shareholders annually. Pepsi has increased its dividend 41 years in a row too.

Dividend Boost No. 3: Microsoft (NYSE: MSFT)

Computing software giant Microsoft (Nasdaq: MSFT) operates around the world in many segments of
the computing business and gaming world. Everyone uses (or at least knows about) Microsoft’s software
or computing systems. In 2014, the company sold almost $87 billion in goods and services. It sold
almost $78 billion the year before… Microsoft knows how to make money.
Its competitors are Google, Oracle, and Apple. But Microsoft outdoes each of them on almost any metric.
In revenue, it beats Oracle by $48 billion. And it has better gross margins than Apple by almost double –
69% versus 38%. Its operating margins are tops, too, at 32% versus 29% for Apple and 23% for Google.
MSFT does a couple things we like to see in a good business. First, it generates tons of cash. Its cash on the
books currently totals about $83 billion. Second, the company is paying some of that extra cash back to
shareholders. It distributes a bond-like 2.8% cash dividend and regularly buys back outstanding shares.
MSFT has paid out $22 billion and bought back $14 billion of its stock total over the past three years.

5
With fewer shares outstanding, our percentage ownership keeps rising. For a computer technology
company, this sort of return to shareholders is unheard of. Apple and Google pay essentially nothing to
their shareholders.
And MSFT is sitting on $83 billion in cash. Its dividend could easily rise to 4% for the next 10 years
with that cash hoard.

The Nuts and Bolts of Reinvesting Dividends

So what’s the most efficient way to funnel all the income these stocks will generate into new shares? For
compounding income to work its magic, you can’t have your capital eaten up by fees and commissions.
You’ll find a lot of advice that the best way to grow your wealth is through reinvesting your dividends by
using something called a Dividend Reinvestment Program (DRIP).
Created decades ago as a way around expensive brokerage commissions, DRIPs allow individuals to buy
into companies without going through traditional Wall Street firms. At the time, this represented a huge
benefit to the investor... In the 1960s and ‘70s, commissions represented a significant cost and made
small purchases prohibitively expensive... A 10-share stock purchase (for a total of $300) might have
another $100 commission tacked on top. The stock would have to increase a huge 33% just to cover the
transaction costs.
So companies were pleased when the federal government allowed them to sell stock to individual
investors through DRIPs. People could buy their shares and reinvest the dividends, even if they only had
a little bit of money to start.
If you want to get part of your portfolio “off the grid,” DRIPs are a good investment.
But in terms of ease of investing and saving money, I’ve discovered an even better, less expensive way to
reinvest your dividends. Here’s how things have changed for investors since these programs began...
First... most companies farm out the administration of their DRIPs to a third-party company, called a
“share registry.” These companies act as a transfer agent between you and the company you want to
purchase shares from. Over the years, these share registries have increased their fees. In some cases, it
can cost as much as $20 to set up the DRIP. The table below shows the fees for the stocks in this report...

Stock Setup Fee Dividend

Reinvestment Fee $50.00 5
MDT $10 + 5% reinvestment fee None
PEP $10 None
MSFT $2.50 + $0.10 per share commission None

All three companies have some sort of fee for using the DRIP. Notably, Medtronic’s DRIP not only
charges a one-time setup fee, but it also tacks on an extra 5% fee on the dividends you receive. MSFT
has a $2.50 transaction fee plus a 10-cents-per-share commission. This isn’t good news for us.
In addition, both stocks use different registry companies... lots of extra paper work to keep track of
everything. This is ridiculous.
Instead... if you already have an online brokerage account... that standard stock trading platform is the
best way to reinvest your dividends... Buying all three of the stocks through the same broker makes

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tracking your positions easier. Plus it’s more cost-effective. Here’s why...
Six of the seven brokers I describe in my report, “The Retirement Guide to Buying Securities,” don’t
charge a fee to reinvest dividends. Below is a breakdown of the broker fees for buying the initial amount
of stock and then reinvesting the dividends:
Broker Cost Per Trade Dividend Reinvestment Fee
TradeKing $4.95 None
Fidelity $7.95 None
OptionsXpress $8.95 None
TD Ameritrade $9.99 None
E*TRADE $9.99 None
Interactive Brokers $0.005 per share No automatic reinvestment
Interactive Brokers doesn’t allow investors to automatically reinvest dividends... You need to use the
dividends you receive in your cash account to buy more shares. But the cost to do this is small. One of
the representatives we spoke to said the cost would be “half a penny per share with a $1 minimum.” You
have to first buy the shares and then select the option allowing dividend reinvesting.
Even the two most expensive brokers on the list – Here’s another great secret to building
TD Ameritrade and E*TRADE – are a penny cheaper wealth... Set up your IRA to reinvest divi-
than the $10 you would need to start a DRIP with dends. This shields your income from tax.
Medtronic or Pepsi. Plus, you’ll save on the 5% And this allows for compounding that much
reinvestment fee Medtronic charges.
faster. And you won’t have to take the extra
Buying all three of our picks (and reinvesting the time looking through all your 1099s.
dividends) would cost you $14.85 at TradeKing or
$29.97 at Fidelity. This is less than the minimum of $45 often needed to invest in the old style DRIPS.
Setting it up is easy, too. Just make an initial purchase and pay the commissions. (We list their charges
in our report, but the max is $9.99.) Then you’ll have the option to have the dividends sent to your
“cash” account (or your bank account) or have them reinvested.
The web page to select your option to reinvest dividends varies from broker platforms. If you have any
trouble finding the option to reinvest your dividends, your brokerage’s customer service department
should be able to help over the phone.
Bottom line... for convenience and savings... don’t use the old school DRIP anymore for new money... go
with your online broker’s reinvestment option. And if you don’t already have a broker, it’s easy to get an
account with any of the seven brokers listed above.
As always, I recommend you put no more than 4%-5% of your investment portfolio into any one of these
companies and maintain a 25% trailing stop.

The Secret 24% “CD”

My second strategy has nothing to do with stocks, bonds, or any other risky investment.
Quite simply, this investment – what we call a “Tax CD” – is created and administered by state and local
governments all across the country. Essentially, it’s a way for your local government to raise money.

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Like all great opportunities, it will take some work. (But don’t worry, you’ll have time to do the research
because, in many states, you can only take advantage of it once or twice a year.)
I’m talking about buying tax liens on your county courthouse steps. And right now, it’s one of the best
alternatives to leaving money lying around earning next to nothing.

An Investment That Wins 95% of the Time

The basic idea of tax lien certificates is simple...
Here’s just a small sampling of
Every year, the local municipalities require property the interest rates per state:
owners to pay taxes on their real estate – the taxes Alabama 12%
cover sewer, trash, and police. But every year for
many reasons, people don’t pay those taxes. It’s up to Arizona 16%
the county to chase down those delinquent payers. Connecticut 18%
Colorado 10%
But since the city needs that money, it allows other
individuals (us the investors) to pay the back taxes in District of Columbia 18%
exchange for a lien on the property. The government Florida 5%-18%
regularly auctions these “tax liens” on the courthouse Hawaii 12%
steps (at least once a year and as often as monthly).
Iowa 24%
Once the person pays the taxes, the lienholder gets Kentucky 12%
his money plus interest. The investment is incredibly Louisiana 12%
secure because it is collateralized by the value of the
real estate. If the property owner never pays the taxes, Maryland 6%-24%
the government will eventually seize the land and Massachusetts 16%
force the sale. Mississippi 18%
In most cases, people want the tax collector off their Missouri 10%
backs as soon as possible and pay what they owe – Montana 10%
this means a quick return on your money. Even in Nebraska 14%
the worst case... when the government forces a sale...
the holder of the tax lien is first in line to get paid in New Jersey 18%
foreclosure. North Dakota 12%
Ohio 18%
There are more details to consider, of course. Every
state is different, with different interest rates, Oklahoma 8%
penalties, fees, and time periods to pay back taxes. South Carolina 8%-12%
So you do have to roll up your sleeves here and do South Dakota 10%
a good deal of homework. But that’s also part of the
beauty of it... You have literally thousands of these Tennessee 10%
tax lien certificates available, and not many people Vermont 12%
willing to figure them out. It’s a perfect way for a West Virginia 12%
Retirement Millionaire reader to make safe income and
Wyoming 15%
even capital gains.

Risks of Investing in Tax Liens

The beauty of this opportunity is the tax collector charges steep penalties and fees for late payments. For
example, Illinois and New Jersey stick it to delinquent property owners for 18%... Massachusetts 16%...

8
and Hawaii 12%. Those percentages represent your gains. When the property owner pays his taxes and
fees, you get your original money back, plus the fees.
The best part is, property owners pay off 95% of these liens within a couple of years (sometimes within
months). Thus, you can easily and safely earn 16%-24% a year on your money by investing in these liens.
Worst case is the taxes and penalties aren’t paid, and the property has to go to auction. Once it’s sold,
you get your money back. Because taxes are usually only 1%-2% of the value of the property, it’s almost
impossible to get back less than your initial investment from the proceeds of a foreclosure sale.
In some states, you can actually get the property for just the cost of the taxes and penalties you’ve
already paid (but this is rare).
The bankruptcy can represent a big question mark... and risk. Before you bid for a tax lien, you have
to make sure the lot exists, is accessible, and is worth significantly more than the back taxes to ensure
you’ll get your money back with full interest.
As long as you’re certain of these things... then bankruptcy mostly represents a delay in when you
receive your payback. The laws surrounding foreclosure vary among states... and can at times be
Byzantine. For example, in Florida, the foreclosure process can start only after two years of delinquent
property taxes. Even then, it takes time and you can’t be sure when you’ll get paid.
Still, the rewards here usually outweigh your risks. This is a lot more secure and a lot less risky than the stock
market... Again, 95% percent are paid with a couple years (usually sooner). That kind of certainty is hard to
beat, especially when it comes with a built-in 16%-24% gain.

Six Steps to Collecting Amazing Income Checks

The clerk of court in your county sells tax liens at In addition to following the six steps I
auctions. outline at the end of this report, I encourage
you to buy a few books on tax liens a couple
Often, the court “advertises” the auction in the local months before the auction so you know
newspaper. They’re hidden away in the legal-notices exactly what to expect.
section of the classified ads. The notices don’t give the
property address. They just give the legal description Here are several books I recommend...
of the property, which sounds like a bunch of mumbo (They’re easy to find on Amazon.)
jumbo. Here’s a sample...
The Complete Guide to Investing in Real Estate
...said certificate embraces the following described property
Tax Liens & Deeds: How to Earn High Rates of
in the County of St. Johns, State of Florida, to-wit: PARCEL
Return – Safely By Jamaine Burrell
NUMBER 050602-1030 SEC 09 TWP 10 RGE 28 PART
OF SE 1/4 & PART SEC 16 330 X 404.8 FT (EX S 70 &
Profit by Investing in Real Estate Tax Liens:
E 30 FT) OR TRACTS 1030 & 1031 UNIT 2 FLAGLER
Earn Safe, Secured, and Fixed Returns Every
ESTATES UNRECORDED PLAT OR696/1613 & Time By Larry Loftis
2729/1739(D/C)
The assessment of the said property under the said certificate Real Estate Tax Deed Investing: How We Made
issued was in the name of [name withheld]. Unless said Over One Million Dollars in Two Years By Matt
certificate shall be redeemed according to law, the property Merdian and Laurence Samuels
described therein will be sold to the highest bidder at the
front door of the RICHARD O. WATSON Judicial Center, Complete Guide to Real Estate Tax Liens and
4010 Lewis Speedway, St. Augustine, Florida, 32084, on Foreclosure Deeds: Learn in 7 Days By Don
SEPTEMBER 30, 2009 at 12:00 o’clock noon. Sausa

9
It’s almost impenetrable. But you can take the parcel number and enter it into the local property
appraiser’s website. That should identify the property and all the info, aerial views, and so on. (If you
care to, you can also get this info by braving the elderly ladies guarding the property-records office.)
Taking the time to do a little homework could be worth as much as 24% in annual income checks.
I’d be willing to bet that you can get great buys just about anywhere... Local governments don’t care
what the properties sell for or how many people show up to the auction. They just want their taxes. So
they do a terrible job of promoting them, and usually just a few bidders show up.
How can you earn 16%-24%? First, find out if your state is a tax-lien state or a tax-deed state. (Don’t
worry about the distinctions. We’re only interested in tax-lien states.) Not every state handles back taxes
through lien auctions. Here’s a list of tax-lien states: AL, AZ, CO, FL, IL, IN, IA, KY, MD, MI, MO, MT,
NE, NJ, ND, SC, SD, VT, WV, and WY.
State law determines the interest, penalties, and fees the owner has to pay to redeem the lien from you
the investor. In some states the owner pays a minimum penalty (5% in Florida) no matter when the lien
is redeemed – even if it’s two days later.
If you live in or want to invest in one of the tax-lien states, call the courthouse and find out what time
of year and what type of auction it holds. In some states, the auction bidding is for interest rates the
investor will receive. For example, in Florida bidding starts at 18% and goes down to 0.25%. In other
states, potential buyers bid on the nominal amount of taxes owed and go up, but with an interest rate
attached to the final balance. In some states, it’s a mix of the two. These are local details the court
employees can explain.
That’s why I love to visit the courthouse and talk with the people in the property departments. They
have books and records easily available, although not always understandable. And by hanging out in
person in the offices, your questions are quickly answered. A few counties now have online records you
can peruse from home.
Once you’ve picked out the properties, at least a week or two before the auction, visit all the properties
you’re interested in bidding on. Be sure and set the limit you’re willing to accept. Once the auction
happens you’ll easily lock up returns of 12% on your money and in amounts as little as $500-$1,000 –
amounts that anyone can invest.
So here’s what you need to do:
1) Go to your local county clerk of court website and search for “tax lien sales,” “tax deed auctions,” or
something along those lines. You can also call the clerk of court’s office and ask where the information is
published and when the next auctions are.
2) Check out the properties up for auction. First, look them up on Google Earth (or Google Maps) to find
out exactly where they are. Then, drive by them and make sure they have rights-of-way and such.
3) Figure out what you’d be willing to pay for them. A starting figure for this “trick” is to take the
property appraiser’s number and cut it in half. That’s for a great property. If it’s something that’s not
particularly impressive, try to buy it for 25 cents on the dollar. (Yes, I’m serious.)
4) Before you show up at the auction, pick up a couple of five-star-rated books on tax lien investing from
Amazon and know them backward and forward... particularly the rules of your state.
5) Visit the courthouse and thumb through the big file for the property. Ask questions about the

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property... you’d be surprised at what you can learn.
6) When you go to the auction, stick to your prices. Don’t get caught up in the bidding.
Researching and buying tax lien certificates takes a little bit of time and dedication. It’s rare to find an
investment that 95% successful and offers built-in returns of 16%-25%. Income investors will have a
hard time finding a better, safer alternative in the market today.

How to Collect Thousands in Tax-Free Income

I don’t know about you, but I plan to keep as much money as possible for my family, instead of having
my hard-earned dollars going to support a bunch of incompetent and mostly unnecessary government
workers.
And one of the best – yet poorly understood – ways to do this is through a simple financial “loophole” I
call the “Tax-Free Income Account.” The investment lets you legally collect tax-free income checks every
single month, for the rest of your life... no matter how much income you make every year. Anyone can
take advantage of this.
I’m talking about municipal bonds.
Let me explain how it works...

Unusual Relationship in the Bond Market

As you may know, municipal bonds represent promises from local and state governments to pay back
money they borrow. In exchange for borrowing money, they pay the bondholder interest every six
months plus the original money (the principal) back at maturity (which ranges from two to 30 years).
The money generated from the bonds is used for infrastructure – like building highways and firehouses.
Holders of the “munis” receive income exempt from federal income tax and, in many cases, state and
local income taxes.
In normal times, municipal bonds are priced as nearly risk-free investments. But these are not normal
times. And fear has driven the yields to levels that don’t make sense. That is handing us an opportunity
we need to take...
Normally, municipal-bond yields trade for less than the equivalent maturity U.S. Treasurys. Assume the
likelihood of default on a bond is equivalent... if one bond pays tax-free income (munis), the rate it pays
on the principal should be less than the taxable bond.
If you were in a 50% income tax bracket, a U.S. government bond paying 7% would yield only 3.5%
after tax. In contrast, your tax-exempt bond yielding 4% provides the equivalent of a taxed U.S.
government bond that pays 8%.
Take a look at the chart (on the next page) showing the yields of 20-year Treasury and municipal bonds.
The average “spread” between Treasurys and munis has been around 75 basis points (0.75%) going back
to 1953. That means munis have traded with 0.75% less interest-rate yield than the comparable maturity
U.S. Treasury bond.

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Since 1950, municipals traded at a lower interest rate than Treasurys almost 90% of the time. But for the
last couple years, the spread has inverted and sits now at negative 24 basis points (or -0.24%).
People believe the risk of default to municipal bonds is much higher than it’s ever bee – greater
even than during the Korean War, Vietnam, the 1987 Crash, the S&L crisis, or the tech bubble of
2000...
At extreme times, it’s critical to chart your strategy based on facts. And right now, the facts tell me...

The States Aren’t Going to Default...

In 2010, banking analyst Meredith Whitney went on 60 Minutes claiming the municipal-bond market
was facing “hundreds of billions of dollars” in defaults.
When Whitney made her prediction, $30 billion exited municipal-bond funds in just three months. The
biggest muni-bond fund is the Vanguard Intermediate-Term Tax-Exempt Fund (VWITX). Shortly after
Whitney made her claims about massive defaults, VWITX plunged less than $13 a share (from close to
$14 a share).
One idea circulating argues the overall municipal debt, around $3 trillion, is unimaginably large and far
too great to ever pay off... or for the states and localities to even cover the interest payments.
This simply isn’t so...
First, many state and local governments have legal requirements to balance their budgets... and that
means facing the reality of their fiscal decisions. Sure, property taxes are down and may go lower. But
municipalities generally don’t shirk their obligations.
In many places, budgets will be cut before the governments default on their bonds. Local citizens will
start taking on some of the ancillary responsibilities. That’s why Whitney is wrong. We have already
seen this in places like San Diego, where private citizens started caring for the parks and dealing with
trash.

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And of course, taxes will rise. That’s the easy answer for most governments... turn the screws some more
on the productive members of society.
More important, the key question surrounding default is whether the municipality can cover its interest
payment, or “debt service.” Turns out the debt service makes up a small part of the average state budget.
The ratings agency Fitch reports debt service is “less than 10% of the government’s budget.” While
income and property taxes are half that percentage at the state and local levels. Hardly reasons to renege
on municipal debt.
Or look at it another way... Take the total muni debt of roughly $3 trillion and say the average cost of the
interest is 3% a year. That means total interest cost is $90 billion a year. Compare this with the state-tax
collections of $715 billion in 2009. Worse case, if all the muni debt was to be “guaranteed by the state”
as some people claim, we’re talking about less than 13% of the total revenue would be needed to pay the
interest.
From a legal standpoint, it’s hard for localities to go bankrupt, which can mean walking away from local
citizens who live off the income of the bonds.
The worst case in modern history is Orange County, California. It went bankrupt over derivative trading
losses... But eventually, the county paid every dime it owed on the bonds.
And there’s more evidence to lead us to think things are improving and “hundreds of billions in default”
is hyperbole.
Meredith Whitney couldn’t have been more wrong about munis. In 2011, defaults totaled just $2.6
billion… hardly the disaster industry “experts” were expecting.
Investors have no reason to avoid municipal bonds right now...
The ratings agency Fitch reports that interest payments on debts like muni bonds makes up less than
10% of those governments’ budgets. Income and property taxes are half that percentage at the state and
local levels. So there’s little reason for the vast majority of municipalities to default.
Over the 40-year period of 1970-2009, the default rate for investment-grade municipal bonds was only
0.06%, compared with 2.5% for investment-grade corporate bonds. Despite recent negative media
attention, this illustrates that munis remain a high-quality, low-default asset class.
The economy is chugging along slowly. As it improves, states and localities will collect more revenue.
And we have two great ways to take advantage of this opportunity....

Tax-Free Income Opportunity No. 1:

Nuveen AMT-Free Municipal Fund (NYSE: NEA)
The Nuveen AMT-Free Municipal Fund (NYSE: NEA) is an exchange-traded fund that holds a basket
of municipal bonds. So that means we’re pooling our money with other investors and minimizing the
risk from any one or two bad investments.
And of course, since the fund is invested in munis, our risk is already low. As I previously mentioned,
the default rate on municipal bonds is low. This is the sort of low-risk opportunity I look for.
NEA invests about 90% of its assets in munis rated Baa/BBB or better. The turnover rate is a low 8%.

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We’ll expect to get monthly dividend checks, currently paying $0.069 per share every month. This
works out to an annual 5.7% distribution rate paid monthly.
Right now, NEA is trading at about a 10% discount to the value of its individual holdings (net asset
value, or “NAV”). (I won’t buy a fund when it’s trading at a premium.)
And as always, keep a 25% trailing stop on both of these positions. Put no more than 5% of your
investing capital into each.
Again, put no more than 5% of your investing capital into it.

Tax-Free Income Opportunity No. 2:

Invesco Insured Municipal Income Trust (NYSE: IIM)
Invesco Municipal Income Trust (NYSE: IIM) invests in tax-free fixed-income securities. It holds a
diversified portfolio of A-rated (or higher) municipal securities. The interest and principal payments are
also covered by insurance. Owning a fund that holds insured investment-grade paper means we can
sleep well at night.
In addition, this fund tends to buy and hold its securities to maturity – measured by a relatively stable
20% turnover rate. Generally, I avoid bond funds that have a high turnover rate (meaning they buy and
sell quickly). It means they are trying to trade their way to good performance. I prefer the fund managers
spend time selecting safe credits to put into the portfolio and hold them to maturity. That way, we get
exposure to the asset category (muni bonds) and are less likely to get burned by people trading interest
rate changes.
We’ll expect to get monthly dividend checks, currently paying $0.075 per share every month. This
works out to an annual 5.3% distribution rate paid monthly.
For people in the 35% tax bracket, this works out to an 8.2% taxable equivalent yield.
We’ll also make money as spreads normalize over the next two to three years. That would give us capital
gains and lock in our yields at today’s levels.
Like any bond investment, if interest rates rise, we could lose money on our initial capital invested
(“principal,” if we were buying individual bonds). But at higher rates, the fund managers can also invest
at higher rates, boosting our returns longer term.
Right now, IIM is trading at about a 7.9% discount to its NAV, making it a great time to buy.

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Retirement Millionaire
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