income investments that beat stocks

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Grab the Highest

Interest Possibleon Your Money!Income Investments

That Beat Stocksby Dr. Mark Skousen

Editor, Forecasts & Strategies

Eagle Publishing • One Mass. Ave. NW • Washington, DC 20001

Copyright 2010 by Mark Skousen • www.MarkSkousen.com

All rights reserved $20.00



IMPORTANT NOTE: This special report is for information and educational purposes only based on

data as of October 2010. Do not buy or sell any investments until you have read the current issue of

Forecasts & Strategies, a current Hotline, or an email update from Mark Skousen.

Grab the Highest Interest Possible on Your Money!

Income Investments That Beat Stocks

Copyright © 2010, by Mark Skousen. All rights reserved.

No quotes or copying permitted without written consent.

Published by:

Eagle Publishing, Inc.

One Massachusetts Ave. NW

Washington, DC 20001

800/211-7661

Email: [email protected]

Website: www.MarkSkousen.com



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1- Grab the Highest Interest Possible on Your Money! Income Investments That Beat Stocks

Grab the Highest Interest

Possible on Your Money!Income Investments

That Beat Stocks

A Special Report on Prime Rate Funds, Super Dividends, Stock and

Commodity Convertibles, High-Yield “Junk” Bonds, REITS, and Other

Extraordinary Income Opportunities

Remember Aesop’s Fable, “The Tortoise and the Hare”

The Hare was once boasting of his speed before the other animals. “I have neveryet been beaten,” said he, “when I put forth my full speed. I challenge any one here torace with me.”

The Tortoise said quietly, “I accept your challenge.”

“That is a good joke,” said the Hare. “I could dance round you all the way.”

“Keep your boasting till you’ve beaten me,” answered the Tortoise. “Shall werace?”

So a course was fixed and a start was made. The Hare darted almost out of sight atonce, but soon stopped and, to show his contempt for the Tortoise, lay down to have anap. The Tortoise plodded on and plodded on, and when the Hare awoke from his nap, hesaw the Tortoise just near the winning-post and could not run up in time to save the race.

Then said the Tortoise: “Plodding wins the race.”

Steady Income in a Crazy Market

As I write these words, we’ve heard a lot of strong talk from Federal Reserveofficials about fighting inflation (an inflation that they engineered with their “easymoney” policies in 2001-04!).



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Fortunately, there is a conservative alternative that will still let you sleep at nightwhile you make money: buying high-income investments at a discount. For two decadesnow, I have focused on this overlooked method for racking up steady gains that yourarely give back. (I say “rarely” because an investment occasionally fails me. There is nosuch thing as a perfect investment. But you can make a lot of money on a strategy that

works 80% or 90% of the time.)

For the last few years, I’ve been doing a standing-room-only workshop atinvestment conferences on my high-income strategy. When you read this report, you willsee why. I offer a simple, but powerful way to make high income sometimes double-digit percentage income with potential capital gains. It doesn’t require a lot of work orresearch, and it doesn’t involve options or short selling. All it requires is some know-howand, most importantly, patience to buy at the right time.

My formula for making money in these turbulent times is simple, but you need tounderstand how the system works, and you need to understand the wide variety of

investment vehicles out there. If terms like closed-end income funds, energy and realestate trusts, prime rate funds, commodity convertibles, and super dividends are foreignto you, read on. My standard rule is never to invest in anything you don’t understand. Geteducated, and then get invested.

My strategy of buying income funds at a discount has been highly successful. Forexample, my recommended portfolio of high-income investments almost doubled themarket during 2006.

Sometimes the stock market will outperform income investments. But when itcomes to the race between the “growth” hare and the “high-income” tortoise, I’ll bet onthe income tortoise for the long run. Compounded interest is indeed the 7th wonder of thefinancial world, and we take full advantage of this approach in this report and in mynewsletter.

Studies have shown that during the long run, stocks outperform bonds, and bondsoutperform cash. That may be true most of the time, but remember, when the globaleconomy is in turmoil, facing war, inflation, recession, corporate scandals, anduncertainty, it pays to have some investments earning income while you wait for themarkets to recover. Furthermore, if you use my strategy, and buy income investmentswhen they are temporarily low priced, you might very well beat stocks over the longterm.

Check Out These Unusual Income Stories

In order to better understand my high-income strategy, let’s review some of mypast recommendations. Do not skip over this section. It is vital that you learn from thepast, and see how I’ve succeeded and the mistakes I’ve made from time to time. You willbecome a better income investor.



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My first experience in high-income investing was almost by accident, but it wasan unforgettable lesson. In 1991, I had been writing Forecasts & Strategies for more thana decade. Throughout the first 11 years, I focused almost entirely on stocks, preciousmetals, and aggressive growth mutual funds (no-loads). I was young and not particularlyinterested in income investing. However, most of my subscribers were older than me, and

they were interested in income investing, so I started to cover this subject.

High Yield Fund: Profiting from the S&L Crisis

One day in early 1991, I was looking in the financial pages of The Wall Street

Journal and came across a closed-end income fund called “High Yield Fund,” symbolYLD. I couldn’t believe my eyes. The fund was yielding a mouth-watering 23% almost 2% a month! At first, I thought it was a misprint. Typically, the Journal takes lastmonth’s declared dividend and multiplies by 12 to get the annual yield. This can behighly misleading if a fund declares an extraordinary distribution for one month. But Ichecked what the fund had paid out in previous months, and it was not a misprint.

The price of YLD was $4 to $4.25 during this time period. Most high-incomefunds come out at $10 a share, and this one was no exception. It came out in the mid-1980s at $10 and was known as a “junk” bond fund, meaning that it invested largely inhigh-risk companies loaded with corporate debt, usually involved in a leveraged buyout.“Junk” bonds became a popular vehicle in the 1980s. Used by Michael Milkin and othercorporate “raiders,” junk bonds financed takeovers, mergers, and acquisitions.Companies had to offer high yields, often at 10% to 15% a year, to attract investors awayfrom “safe” Treasury bonds.

Since YLD was issued in the mid-1980s, interest rates had declined. Falling

interest rates mean that bond prices should be rising (interest rates and bond prices tendto move in opposite directions). Thus, you would expect YLD to have risen above $10,but instead it had fallen and fallen sharply. I had to know why.

The answer was pretty simple: the Savings & Loan crisis of the late 1980s. S&Lshad engaged in a wide variety of scandalous, risky activities in real estate and leveragedbuyouts. When the 1986 Tax Reform Act passed, commercial real estate lost its tax-favored luster and the S&Ls started bleeding. When the federal government intervened tobail out the S&Ls, one of the requirements was that these institutions had to sell off their“junk” bonds within a year. In 1990, the “junk” market crashed and S&Ls sold wave afterwave of junk bonds.

For investors enticed by the high yield on junk bond funds, such as YLD, theywere slaughtered. A $100,000 investment in YLD may have yielded 12% a year, but theloss of principal far outweighed the benefit. A $100,000 investment was now worth only$40,000. An investor gained $12,000 in income, but lost $60,000 in principal!

But there was a silver lining in the S&L bailout clouds. YLD and other closed-endjunk bond funds were now yielding 23%, and that was after the normal 8% default rate



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on junk bonds. The funds continued to pay out a very high monthly dividend of approximately 8 cents ($1 a year).

So in early 1991, I made my first income recommendation: Buy YLD at between$4 and $4.25. It was a good call. In the next two years, as the economy recovered and the

banking crisis subsided, YLD rose to more than $6 a share. Meanwhile, during those twoyears, my subscribers continued to earn a dollar a year in dividends (8 cents per month),or 23% yield. After two years, my subscribers had doubled their money mind you, onan income investment!

Magma Copper Bonds: 14% Yield Plus Capital Gains!

During this same time period (the early 1990s), I started recommending acommodity income play. Magma Copper, the second-largest copper producer in theUnited States, issued some unique copper bonds in the late 1980s as part of a leveragedbuyout. Basically, these bonds paid a monthly income, based on the price of copper, that

yielded between 12% and 18% annually. The higher the copper price, the higher theincome. This made economic sense. If copper prices rose, Magma Copper would be moreprofitable and could afford to pay a higher yield. During the time I recommended MagmaCopper bonds (1989-1992), the company paid out anywhere from 14% to 18%. Inaddition, most of my subscribers were able to buy these bonds below par at around 93(par = 100).

In early 1992, Magma Copper decided to “call” these bonds (most corporatebonds are callable) at 106. That meant that my investors earned a capital gain of almost14%, while earning a double-digit percentage yield of 14-18%. My only regret was thatMagma Copper called the bonds so soon.

November 1994 Election: VOTE for VOT

The year 1994 was a tough one for income investments and the stock market. TheFederal Reserve feared a return of inflation and raised interest rates sharply. Then camethe dramatic election in November 1994, when the Republicans took control of CapitolHill and won back the House and the Senate. I predicted a major bull market in stocks,bonds, and the dollar. Among income choices, I focused on an especially attractivebargain: Van Kampen Opportunity II Income Fund. It invested in investment-grademunicipal issues. At $10, it was yielding 9.0% tax free and selling at an 18% discount toits Net Asset Value, or NAV. (See glossary terms at the end of this report.) The Fed’s

high-interest rate policy had created quite an “opportunity,” indeed. In fact, mostappropriately, the fund’s symbol was VOT. I told my subscribers to buy it: “Vote forVOT!”



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It was a good call. (See the chart above.) VOT rallied to $12 a share by mid-1997for a combined total return of around 50% (28% capital gain, plus 9% tax-free income fortwo and a half years). Since then, it moved raggedly higher.

Junk Bonds Enjoy a Christmas Rally

Short-term opportunities also can arise from time to time with high-yielding“junk” bond funds. For example, BlackRock Debt Strategies Fund (DSU), a closed-endbond fund, was hit hard by the Fed’s increase in interest rates in the year 2000. A yearlater, even though the Fed lowered interest rates, the growing recession pushed “junk”bonds down even further. Investors feared that during the economic downturn, the default

rate would rise. Indeed, the default rate rose from 8% to 11%.

By December 2001, DSU had fallen to $6 a share and sold at a 15% discount toNAV. But the yield had climbed to more than 17%. I recommended junk bond fundsduring this time, and DSU and other funds enjoyed a remarkable rally. DSU rose to$7.50. (The price soared dramatically because Warren Buffett suddenly bought junk bondfunds in December 2001, right after my recommendation.)

Foreign Bonds Can Offer Unique Opportunities

Foreign bonds also can offer great opportunities. My favorite example is

Aberdeen Asia-Pacific Income Fund (FAX). It was called First Australian IncomeFund, and it invested primarily in Australian bonds. It went public in 1986 at $10 a share.After a few years of selling above its offering price, it went through a fairly steadydecline, primarily because the Australian dollar fell out of favor. At one point in the late1980s, the Australian dollar was trading for US$1.30. It reached rock bottom at US$0.48in 2002, before recovering to US$0.83 in September 2009. As a result, FAX declined



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from $11 a share in 1994 to $8 in 1995-1998, fell from $8 to $6 in 1999, and finallydipped to under $4 a share in 2002, when Aberdeen took over management of the fund.

My approach has been to buy FAX after some kind of major sell-off, far below itsNet Asset Value (NAV). Such opportunities occasionally arise. For example, in 1995,

FAX fell to $8 a share; in 1999, it dropped to under $6 a share; and finally in 2001-02, itdropped under $4 a share.

FAX is an example of my strategy not always working. I was especially bullishon FAX in 1999, when it hit $6 a share, yielded 12%, and sold below its NAV. But Ifailed to take into account a continued deterioration in the Australian dollar, and FAXcontinued to fall to $5 and then $4, and finally to $3.75. Fortunately, I held on and was anaggressive buyer from 2002 until 2005.

Despite the long-term decline in FAX, here’s an amazing fact: If you had boughtFAX at $10 a share at its inception in 1986 and reinvested all dividends, you would have

seen the following results.

Aberdeen Asia-Pacific Income Fund

Net Asset Cumulative Total Return Annualized Total Return

Value (NAV) (ended 7/31/10) (ended 7/31/10)

Since Inception(April 1986) 767.4% 9.3%

Past 10 years 183.9% 11.0%

Source: Aberdeen Asset Management

The above chart suggests an important principle: You can make good money in ahigh-income investment, even if your principal is declining in value, if you hold for longperiods of time. Now imagine if you had bought FAX each time after it had fallen. Youcould have done even better.

Nine Rules to Obey When Investing for Income

In my 30-plus years of experience in buying income funds, I’ve learned some

pretty important lessons. There are several key rules to obey when it comes to investingin high-income vehicles. Failure to follow these rules could be costly. They are:

The Special Advantages of Closed-end Funds

1. Closed-end funds often offer better opportunities to profit than open-end

funds. Open-end funds always sell at their NAV, equal to the value of the bonds theyhold in their portfolio. They have several advantages. If they are “no-load,” you can buy



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them without paying a commission or bid-ask spread. You also never have a liquidityproblem. You can sell your entire position whenever you want. Open-end funds arerequired by the SEC to redeem your shares at the close of the business day.

On the other hand, closed-end funds can sell for more or less than their NAV.

Closed-end funds trade on the stock exchange, so you have to be concerned aboutcommissions, bid-ask spread, and liquidity. In a bear market, it may not be possible tounload your entire position in one day. It may require you to spread out your selling overseveral days or weeks.

Despite these disadvantages, I prefer to recommend closed-end funds that areselling at less than their NAV. They offer two major advantages.

First, they offer “super-dividends” when closed-end funds sell at a discount toNAV. You earn a higher yield than if you owned the bonds individually. Here’s anexample. Suppose you own a hundred 10-year Treasury bonds priced at 100 (par) and

yielding 5%. On your $100,000 investment, you receive $5,000 a year in income fromyour T-bond portfolio.

However, suppose there is a closed-end bond fund that invests in 10-yearTreasury bonds. Its NAV is $10 a share, but you can buy it for $9.00 on the market today.If you invest $100,000 in this fund, you could own 11,111.11 shares, and you wouldreceive $5,555.55 a year in income. By buying the closed-end income fund instead of theindividual T-bonds, you earn 11% more income!

Many closed-end funds also leverage their returns with borrowed money,something that open-ended funds aren’t able to do. As a result, high-yielding “junk”bonds may be yielding 10%, but a closed-end fund using leverage (typically 30% of thefund is borrowed) can earn 13% or more. Leverage is a great deal for investors wheninterest rates are low, as they have been lately. Closed-end funds borrow short term (at 1-2%) and buy higher yielding, long-term bonds (at 4-10%, depending on the bond). Butbeware when interest rates start back up, these closed-end funds can lose moneyquickly and you need to be prepared to sell.

Second, deeply discounted closed-end funds offer better opportunities to earncapital gains. If a closed-end fund is selling at a deep discount, it usually means that aparticular market sector is in a bear market and out of favor with investors. The investorshave lost faith in the fund and have moved to another investment. This is often the caseafter a long rise in interest rates. When the market turns around, both the open-end fundand the closed-end fund will increase in value, but the closed-end fund will tend to rise

faster because the discount will gradually disappear.

So, this brings me to rule #2.

2. Buy closed-end income funds selling at a substantial discount. How muchof a discount? I consider a 5% discount a “good deal,” a 10% discount a “bargain” and a



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15% or more discount as a “super bargain.” It is difficult to determine in the future howdeep the discount will go. You have to sense the intensity of the public mood and themarketplace. Check the latest issue of Forecasts & Strategies, the hotline, and emailalerts. I’ll keep you abreast of the best time to buy a closed-end fund at a discount.

3. Avoid closed-end income funds selling at a premium. You might be temptedto buy a closed-end income fund solely because of its high yield. For example,BlackRock Debt Securities Fund (DSU) currently is yielding 8.2% (in part, due toleverage). But it can be risky to buy such a fund for income only, because the fund’sprice may be overvalued and selling far above its NAV. Better to wait patiently for thefund’s price to decline to below its NAV, when few investors want it, and then you arelikely to earn high income and potential capital gains.

Where to Find the Current NAV of Any Closed-End Fund

Daily newspapers and Internet sources do not normally carry the latest Net Asset

Value (NAV) of closed-end funds. Barron’s lists the current NAV (weekly), and so doesMonday’s Wall Street Journal. But there is a source that lists the DAILY NAV: Go towww.cefa.com. It’s the official website of the Closed End Fund Association. It lists thecurrent price, NAV, discount or premium from NAV, and yield. The site is highlyrecommended.

4. Buy after a major decline in income investments. During the lifetime of anincome fund, it’s best to wait patiently for a major “sell-off” in the fund.

Income funds may face a variety of troubles that can cause a sharp decline in itsprice, such as:

A government action against the income industry. During the late 1980s,junk bonds were hit hard by the federal agency’s decision to force S&Ls to sell off all of their below investment-grade bonds. In the late 1990s, the SEC ruled that prime ratefunds had to reevaluate their commercial loans.

Tight-money policies by the Federal Reserve. A sharp increase in interestrates, as occurred in 1994 and 2000, can hurt bond funds. Rising interest rates especiallycan hurt closed-end funds that are leveraged with borrowed money. Many of my favoritefunds fit into this category, so be alert to get out when rates start climbing. However, notethat some income funds, such as the prime rate funds, can benefit from higher interest

rates more on this later.

Economic downturn. A tight-money policy by the Fed might cause a recessionor worse, and investors may fear about the security of companies with below investment-grade bonds and unload these “junk” bonds and junk bond funds. This even may occurduring a time when the Fed is reducing interest rates, as was the case in 2001.



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Rights issues. From time to time, closed-end funds raise additional funds bydeclaring a “rights issue.” This allows new investors to come on board and buy moreshares of a closed-end fund at a set price. This is known in the business as “diluting thestock” and usually causes the fund’s price to drop by 10% or more. The best time to buya fund is right AFTER the announcement of a rights issue. The fund drops in price, but

then recovers. (For example, MuniMae (MMA) announced a rights issue during 2006.)

Sudden sell-offs by large investors. From time to time, large investors unloada closed-end fund. Sometimes no one knows the reason. Perhaps a large investor needsthe cash to make another investment or to meet a margin call during a market crash, etc.Usually these are good times to buy, AFTER a sudden sell-off by large investors.

5. Do NOT buy new issues of closed-end funds. Typically, closed-end fundscome out at $10 a share (sometimes $15). Brokers entice customers to buy these fundsbecause there is “no commission” on new issues. What they don’t tell you is that thecommission is built into the initial offering price of $10. The commission is paid by the

investment company, and it’s substantially more than the regular commission on fundssold on the stock exchange. Stock brokers have an incentive to promote new, closed-endfunds.

The second reason for not buying a new, closed-end fund is that, in most cases,the fund inevitably falls below its NAV after it starts trading on the stock exchange. Whynot wait and buy the fund when it’s selling for less than its NAV?

If a fund goes public and starts selling immediately at a premium, don’t panic.Wait patiently for it to drop below its NAV, or better yet, below its offering price, andthen buy. You’ll be far better off.

What About Unit Investment Trusts?

Many brokerage firms, such as Nuveen, Putnam, Van Kampen, Pilgrim, andMerrill Lynch, offer “unit investment trusts” (UIT) as a low-cost, diversified way to buybonds, especially municipal bonds. They have the advantage of a fixed income for the lifeof the issue, and at maturity you get a 100% return of your money. With normal mutualfunds, there is no maturity, and if interest rates rise and stay high, your fund will fall invalue and never recover. It is so with muni UIT. The drawback is that you are investedfor the long term until the UIT matures. If you want your money back before maturity,you will pay a penalty.

6. Look for great opportunities in income investments when the Federal

Reserve changes direction in interest-rate policy. Take a look at the graph on page 11to see the results of the Fed’s interest-rate policy since 1987, when Alan Greenspan took over as Fed chairman.

As you can see from the discount rate chart, the Fed has engaged in a roller-coaster ride when it comes to interest-rate policy. Since 1987, the Fed has changed its



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monetary policy more than a half dozen times. That’s a change every 2-3 years! Such aroller-coaster ride offers many bargain opportunities for income investors.

The best time to buy bonds is when interest rates start declining. Since 1987, thebest times have been: 1990, 1995, and 2001.

I also have good news there is a way to profit from rising interest rates as well.You want to avoid buying most bond funds when interest rates are rising, but there is agood investment vehicle when interest rates are rising: prime rate funds!

7. Buy prime rate funds when interest rates increase or threaten to increase. Prime rate funds are very different from bond funds. When interest rates rise, bond pricesdrop, and vice versa. That is not so with prime rate funds. Prime rate funds (see thefollowing recommendations) are investment companies that hold prime-rate loans madeto major corporations. The prime rate is the rate of interest that commercial banks chargemajor corporations. As of September 23, 2010, the prime rate was 3.25%.

When interest rates fall, the prime rate generally falls, too. This has two effects onprime rate funds. First, the monthly dividend declines with the prime rate. Incomeinvestors earn less each month. Second, because of this decrease in dividends, investorstend to sell prime rate funds, and the discount to NAV tends to widen for prime ratefunds.

However, when interest rates rise, just the opposite occurs. As the prime raterises, the dividend goes up, and investors earn a higher monthly income. Second, primerate funds increase in popularity as the dividend rate increases, and thus the discount toNAV tends to shrink, and may even disappear. Prime rate funds may even sell at apremium.

8. During an inflationary bull market in stocks, real estate, and precious

metals, look for high income in stock and commodity convertibles, and REITs. Goodopportunities arise from time to time in convertibles and Real Estate Investment Trusts(REITS). Foreign currency income investments also may be profitable. I recommendthem from time to time.

9. Be sure to use “stop” orders to protect your capital gains in certain income

investments. As you can see from the charts of income investments in this report, manyincome funds suffer from long-term downward trends. In addition, most convertibles,foreign income plays, and REITs go through a boom-bust cycle. It is best to protect yourprofits with a “stop” order, even if it means giving up a nice source of income. (Therealways are plenty of income alternatives around.) Generally, I suggest a “stop” orderwithin 10-15% of your buying price. In my newsletter and hotline, I will inform youwhen we receive a “stop” order on an income investment. For example, we have takenprofits on “junk” bond funds, Muni Funds, and REITs after they hit our “stop” orders.



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Conclusion: You Can Earn High Income

in a Low Interest Environment

We have covered a wide variety of unusual income vehicles in this special report.Because high-yielding investments are inherently risky, you must be careful in yourapproach. To survive and prosper in this dangerous arena, remember the rules:

Diversify into a large number of income investments.

Watch your investments closely and use a “stop” order to protect yourprincipal.

Wait patiently to buy after a big sell-off, due to a new government policy,change in the direction of interest rates, large investors bailing out, etc.

Good luck!

Yours for freedom & prosperity, AEIOU,

Mark Skousen, Ph.D.Editor, Forecasts & Strategies



GLOSSARY OF TERMS

Bid-Ask Spread: The difference between the price a seller is willing to offer for a stock orfund (“bid”) and the price a buyer is willing to pay (“offer”). The moreliquidity (stock volume), the smaller the bid-ask spread. Penny stocks that

seldom trade are likely to have a spread of 10-20%, while blue-chip stocksthat trade in the millions each day will have hardly any spread at all.

Bond: Any interest-bearing government or corporate security that obliges theissuer to pay the bondholder a specified sum of money until maturity. Atmaturity, the issuer returns the original investment back to the bondholder(usually at “par”). Most corporate bonds pay interest semi-annually. Forexample, a $1,000 bond paying 6% will pay a $30 “coupon” every sixmonths. Bondholders have an IOU from the issuer, but no corporateownership privileges, as stockholders do. However, in the case of bankruptcy, bondholders are the first in line to be paid.

Callable: This term means that the issuer of a bond can redeem (“call”) the issuebefore maturity at a set price (usually at the maturity price of “par”).Almost all corporate and many government bonds are “callable.” Bondsare usually called when interest rates fall because the issuer can savemoney by floating a new issue at a cheaper interest cost.

Closed-end fund: An investment company that operates a mutual fund, investing in avariety of stocks or bonds depending on its objective with alimited number of shares outstanding. Unlike an “open-end” fund, aclosed-end fund starts with a set number of shares. They are usually

listed on an exchange, where they are traded like any other stock. Butunlike open-end funds, closed-end funds can sell at more or less thantheir Net Asset Value (see “Net Asset Value”).

Convertible: Corporate securities that are exchangeable for a set number of shares ata pre-stated price. Commodity convertibles are exchangeable at a prestatedprice for that commodity. Convertibles are a sweetener offered bycompanies in a leveraged buyout or takeover to enhance the marketabilityof a stock or preferred stock.

Net Asset Value The dollar value of securities and other investments owned by a mutual

(NAV) fund at a specified time. NAV is calculated after the close of theexchanges each day by taking the closing market value of all securitiesowned, plus all other assets such as cash, subtracting all liabilities, thendividing the result (total net assets) by the total number of sharesoutstanding. Open-end funds must offer to sell their shares each day atNAV. Closed-end funds can sell their shares at, above or below theirNAV, depending on market conditions.



Open-end fund: An investment company that sells mutual funds to the public at its NetAsset Value (see above). Investors or shareholders buy the shares at NAVand can redeem them at the prevailing market price, which can be higheror lower than the price they paid initially. Unlike the closed-end funds,open-end mutual funds increase or decrease the number of shares each

day, depending on the number of new buyers and sellers (thus maintainingan open bid to sell its fund at NAV at all times).

Par: The face value of a bond. A bond selling “at par” is worth the same dollaramount it was issued for or at which it will be redeemed at maturity,typically $1,000 per bond. All bonds trade on terms of 100 basis points,with each basis point worth $10. After a bond is issued, it may fall“below par” or under 100, or “above par” or above 100.

Preferred stock: A class of stock that pays dividends at a specified rate and has preferenceover common stock in the payment of dividends and liquidation of assets

in a bankruptcy. (However, bonds take precedence over preferred stock and common stock.)

Prime rate fund: An investment company that owns short-term debt linked to companiespaying the prime rate. The prime rate is the interest rate charged tobanks’ most creditworthy customers. The prime rate is a short-term ratelinked closely to short-term rates of notes and bills maturing in less thanone year. Rates usually move up or down according to the FederalReserve’s decision to raise or lower the discount rate. The prime ratetends to become standard across the banking industry when a major bank (usually in New York) moves its prime rate up or down.

Real Estate Investment

Trust (REIT): A public company that manages a portfolio of real estate to earn profitsfor shareholders. There are two kinds of REITs: Equity REITS takeequity positions in real properties and receive income on properties, andcapital gains when buildings are sold at a profit. Mortgage REITs ownreal-estate mortgages and pass interest income on to shareholders.

Super Dividend: Dividends from closed-end income funds that yield above-averagereturns due to the fact that a closed-end income fund sells for less thanits Net Asset Value. For example, suppose you buy a corporate bond at100 (par) that yields 10%. However, a closed-end fund that invests in thesame bonds may be selling for below par at say 90. Since these bonds arestill yielding 10%, you actually earn 11.1% super dividends if youinvest in the closed-end income fund.

For more information about Mark Skousen’s Forecasts & Strategies,

go to www.MarkSkousen.com or call 800-211-7661.



Eagle Publishing • One Mass. Ave. NW • Washington, DC 20001

800/211-7661 • www.MarkSkousen.com

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income investments that beat stocks

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