If my objective is capital preservation and income producing investments, is it smart to invest $150,000 in municipal bonds yielding 4.5% or common stock that pays a regular cash dividends of 7%?

ANSWER

Expert Thomas Graham iii's Answer:

If your objective is capital preservation and income producing investments I would tend to lean more toward investing the $150,000 in municipal bonds.  Although it might appear as if the common stock dividends are a no brainer you really need to take into consideration the tax consequences. 

The municipal bonds are tax-exempt therefore your 4.5% return is just that.  However, the common stock dividends are going to be taxed for capital gains.  This can be upward of 35% and just depends on the given year.  If they were taxed at 35% that would mean your true return would be 4.55%, not much more than the return on the municipal bonds.

That being said, I think the municipal bonds offer a more conservative and sounder investment.  I think the soundness of the investment more than makes up for the loss of .05% interest you might obtain.
 

Thomas Graham iii, CPA

Mississippi

2 yrs experience

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