Pacific Investment Management Co. (Pimco) managing director Bill Gross is perhaps the nation's foremost bond guy, but he says investors looking for real returns should turn to consistent dividend-paying stocks like Coca-Cola, Johnson & Johnson or electric utilities rather than U.S. Treasuries.

In remarks made during Wednesday's opening session of the Morningstar investment conference in Chicago, Gross echoed themes he recently wrote in his monthly investment commentary for Pimco, the Newport Beach, Calif.-based money manager with $1.3 trillion in assets

Specifically, he noted the Federal Reserve has kept interest rates lower than they should be in hopes of inflating the economy and boosting riskier asset classes, such as stocks. That's been a boon for the latter but hasn't translated into success for the former. Meanwhile, much of the Treasury yield curve wallows in negative territory compared with expected future inflation.

That means Treasury investors "are getting their pockets picked," Gross told the audience.

Gross said the total Treasury market for all duration periods comprises roughly half of the overall U.S. fixed-income universe, and noted that the segment is yielding just 1.55% on average. He compared that with Japan, which has been in a prolonged state of economic malaise for roughly two decades and whose bond market is yielding about 0.8%. He marveled at how the U.S., which is perceived as being a dynamic economy, could be so close to Japan regarding the paltry yield of its national debt.

And Gross said he doesn't believe that will change anytime soon because the Federal Reserve will likely keep its target rate in the range of zero to 0.25% for the foreseeable future to help prime the pump of economic growth. The Fed probably has to, he reasoned, because it will be difficult to enact another round of quantitative easing monetary policy, or QE3, due to political wrangling in Washington.

That prolonged state of extremely low real interest rates is bad news for Treasury investors, whom Gross likened to frogs in a boiling pot of water that eventually get cooked as the temperature gradually rises.

"Don't be a frog," Gross said. He implored investors to flee Treasuries and put money into other fixed-income vehicles such as overseas markets "where countries aren't as repressive with their interest rates." He named Brazil and Canada as examples of countries that offer interest rates that investors can sink their teeth into.  

In his recent newsletter, Gross recommends that investors should look at investment-grade, high-yield, and non-agency mortgage debt, along with non-dollar emerging market currencies.


- Jeff Schlegel