An ETF for Quality Munis

Focus: ETFs

Todd Shaver Image Todd Shaver Founder and Editor-in-Chief, BullMarket.com

Invesco Municipal Trust (VKQ) is a high quality diversified municipal bond fund that uses active management of a leveraged portfolio of municipal bonds to provide income to investors, observes Todd Shaver, editor of Bullmarket.com.

Dividends are paid monthly, and the fund uses approximately 38% leverage. The fund’s management fees are 0.9%, which is low for an actively managed bond fund. The fund is also one of the oldest muni-bond closed-end funds, having been established in the early 1990s.

The fund currently covers its distributions with net investment income, and all dividends are considered qualified distributions. This means they are tax free for many investors.

Despite Invesco Municipal Trust’s generous yield — currently around 6% — the fund does not expose investors to high risk bonds that are prone to bankruptcy. In fact, the majority of the fund’s holdings have an A-rating or better.

With only 7% in bonds rated BB or below, Invesco Municipal is not playing the trick of buying very low quality issues to boost payouts.

Lower yields on municipal bonds in our low interest rate world has caused dividends to fall for years. The most recent dividend cut was in September.

Paradoxically, that makes this Trust a very good buy right now. After its dividend cut, the undistributed net income balance went positive, which means it is now covering payouts with the income it is earning from its holdings.

The fund is extremely well positioned to cover its dividend in the long term, leading us to make a bold prediction: After years of cutting distributions, Invesco Municipal Trust will actually raise its dividend by the end of 2018.