To figure your tax equivalent yield, simply divide the bond fund yield by 1 minus your marginal tax rate. For instance, if the muni is yielding 7.2% and you are in the 28% tax bracket, your taxable equivalent yield would be 10% (7.2%/(1-0.28) = 10%).
You can buy individual muni bonds, but funds are a better choice for most investors since they offer instant diversification.
Interest in telecoms is mostly confined to the major companies like AT&T (T) and Verizon (VZ), but I've found rich yields and a compelling story in a largely ignored part of the telecom sector -- rural landline phone companies.
These quaint relics of an earlier age throw off huge cash flow and pay healthy dividends. Some, such as Frontier Communications (FTR), have yielded up to 14% at some points this year (the yield is now around 9%).The rural areas these companies serve are too small to interest the big cable and wireless companies. As a result, there is little price competition. You might expect their revenue to be shrinking, but that's not the case. The reason is broadband Internet service. To be sure, customers are shedding landlines in favor of cellular service, but they are also signing up for broadband. For most of these companies, broadband is only a tiny fraction of their revenue base, so there are still plenty of growth opportunities to continue powering yields.
High-Yield 'Junk' BondsJunk bonds may sound like something for the recycling bin, but these investments can be safer than many stocks in one important way. If you own a Junk bond and the issuing company goes into default, you are in line to be repaid before any of the common or preferred stock holders. The key to junk bond investing is understanding bond ratings. Anything Standard & Poor's rates "BB+" or lower is considered sub-investment grade, or junk. But despite the name, these bonds may be less risky than you think. During the credit crisis, junk bond default rates peaked at 12.9%, but have since come down dramatically. According to ratings service Moody's, default rates on junk bonds should fall below 3% this year. The safest way to invest is with a junk bond fund. Like the muni bond funds discussed above, these funds offer diversification across companies and industries. And they also offer some nice yields. The SPDR Barclays Capital High Yield Bond ETF (JNK) currently yields around 10%.
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