Investors Are on the Verge of Disaster

Unemployment is staying stubbornly high, negating a continuation of last year's recovery. A resurgence in the housing market seems dubious. Recently, prestigious Yale University professor Robert Shiller estimated the chances of a double-dip recession are greater than 50%.

It's no wonder there's a mass exodus out of the stock market while cash is flowing into bond funds faster than an Allen Iverson crossover. People are concerned about their future, and their main priority, in the short term, is safety and preservation of capital.

Nevertheless, I'm here to tell you that your investing strategy is most likely on the verge of disaster.

Where's everybody going?
In the frenetic craze to find security for their portfolios, investors are jumping on the bond bandwagon, despite terrible returns. Recently, yields for a 10-year Treasury fell as low as 2.5%, while savings accounts and CDs are dishing out dismal, less-than-1% returns. Yet still, the rush remains:

• According to the Investment Company Institute, bond funds have attracted more capital than equity funds for 30 straight months, the longest such stretch in 23 years.
• Despite a historically low multiple of price to prospective earnings below 13 for the broad market according to Morningstar, investors aren't creating big demand for stocks, as the S&P 500 index is still down for the year.

Don't get me wrong. There's plenty of reason to be worried about the market. Just like everyone else, I'm slowly watching the value of my portfolio decrease as my investments take unwarranted plunges into deeper water. However, regardless of what your macro outlook is, you still need to stay invested in stocks.

Why? Because equities have the ability to provide income, to grow at significant rates, to protect your portfolio against potential inflation, and fixed-income investments just can't offer that same set of qualities. Simply put: Investing in stocks is the only way to secure a safe and prosperous retirement.

Please avoid this mistake
Now I'm not saying that you shouldn't have some of your hard-earned cash in bonds or bond funds. Quite the contrary, maintaining a portfolio with proper asset allocation is crucial, so you should definitely have a significant portion of your money in bonds. But avoiding stocks all together is a huge mistake, and it seems as though it's one that thousands of individuals are making right now.

To try and talk you out of this enormous blunder, I've decided to find seven stocks that I think are totally worthy of your time and money. It's no secret that I'm a huge fan of dividend stocks. They outperform their peers and offer you both growth and income. So I searched for stocks that pay a dividend higher than that 2.5% yield on the 10-year Treasury and that have been able to increase those dividends over the past five years -- no easy feat considering the 2005-2010 time period. Lastly, I looked for companies with low forward price-to-earnings ratios to help ensure value.

Below are seven companies that I strongly feel any investor, young or old, could invest in today and hence would be better off than pouring more money into any old stodgy bond fund:

Source: Capital IQ, a division of Standard & Poor's. Growth = compound annual growth rate.

You may be thinking to yourself that instead of investing in these stocks, you could just buy an index fund and diversify your risk. In fact, many of you are doing exactly that -- only one of the top 10 best-selling funds in 2010, the Vanguard Total Stock Market Index (FUND: VTSMX), is a stock-only fund.

However, the total stock market index fund averages a dividend yield of 2.6% and a forward P/E of 13.1; almost every stock listed above is cheaper than that and pays a more substantial dividend! In addition, I purposely chose stocks that were not only properly diversified, but that also have recession-proof characteristics. Health care, utilities, and food services are all sturdy sectors, and maintaining exposure to commodities and financials is a great way to round out your miniportfolio.

Step up to the plate
I know it's not easy to start investing in stocks right now. There are so many question marks regarding global growth, federal deficits, and the future of equity premiums that no one would seriously blame you for sitting on the sidelines.

But you have to understand that investing solely in an index or a bond fund may provide comfort, but it won't help your money grow at a sustainable rate. Once you're near retirement, you'll need to withdraw a significant portion of cash to pay for your monthly expenses, and having money invested in proven dividend-paying stocks is the best way to ensure that cash is safe and sound.

Interested in how a retiree can get rich? Click here to read the article!