Note: This article is part of Morningstar's Guide to Dividend and Income Investing special report. This article originally appeared July 28, 2015.
At first blush, municipal bonds may not seem like the most exciting investment--essentially, they are bonds issued by state and local governments to finance public projects such as buildings and roads. But here's where they become interesting: These types of bonds provide tax advantages that can be especially beneficial to investors in higher tax brackets. In the vast majority of cases, the income they provide is not taxed at the federal level. In some instances (particularly if issued by a state or municipality in which you reside), munis' income is not taxed at the state or local level, either. (This is a big consideration if you live in a high-income-tax state, such as California, New York, or New Jersey.)
Karen Wallace, CFP® does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.