Bill Gross is a bond fanatic.

He co-founded Pacific Investment Management Company (PIMCO) and is the chief investment officer of PIMCO Total Return, the largest mutual fund in the world. With $234 billion of assets under management and a history of totally outperforming his peers, it is safe to say that, yes, Bill Gross is a true bond junky.

That's why I did a double take when I read in this weeks' Economist that Gross said bond returns "stand at the threshold of mediocrity."

What is he talking about?
The stock market has been flat the entire year (without July's rally, we'd probably be pretty deep in the red). On the contrary, investment-grade corporate bonds are up almost 8%, while risk-free treasuries are up 6%. As the poster-boy for all things bonds, what the heck is he talking about?!

The truth is that interest rates have almost nowhere to go but up. And as yields increase, bond prices move lower, eating away at any gain from the coupon. Over the past 30 years, interest rates have mostly been on the decline, which has helped their general outperformance with regard to stocks.

But those days are most likely over. Considering our nation's vast indebtedness and new concerns about inflation, rates will literally have to creep up over time. How long it takes is anyone's guess, but Gross has said: "It's been a great thrill as rates descended, but now we face an extended climb."

How to reposition yourself
Everyone knows asset allocation is a crucial part of financial planning. Typically, we allocate a portion of our savings to stocks and a portion to bonds and cash, and then we call it quits. The problem is that now we can't expect those spectacular bond returns, and we can't count on them for unlimited yield. That doesn't mean we should stop investing in bonds, but it does mean we should change the way we look at individual stocks.

If you're a retiree or close to retirement, you probably have two main concerns: saving enough money to last your lifetime and having enough current cash to pay for your daily expenses.

This is where dividend stocks come into play. Similar to bonds, dividend stocks dish out a quarterly or annual payment, however, they also have unlimited potential for capital appreciation. Dividend stocks satisfy both of your main concerns by paying you cash up front to help with rent, groceries, and other expenses, but they can also increase their value over time, helping to raise your portfolio in the process.

However, not all dividend stocks are treated equally. If you're an investor that wants to sleep easy at night and not worry about the roller coaster that is the stock market, you should look for low-beta stocks. For instance, the real estate investment trust (REIT) NorthStar Realty Finance (NYSE: NRF) pays a great dividend of 11.4%, but its beta is close to 2. Similarly, commercial leasing aircraft company Aircastle (NYSE: AYR) pays a nice 4.2% yield but also has a beta of 2.5.

While there is nothing wrong with either of these companies, I wouldn't recommend them to older investors as they could churn up and down with the wild tide of the market. If stability is what you're looking for, then you've got to look elsewhere.

The best place to start
Let's say you want to take a portion of your stock portfolio and buy five individual stocks. I would suggest looking for companies that have low betas, pay great dividends, and still have room for growth. In addition, finding companies that you are comfortable with -- typically companies that have illustrated steadiness in the market -- is crucial to being at ease with your selections. The five companies I have chosen below are a great place to begin:


Dividend Yield

1-Year Beta

Estimated EPS Growth*

Windstream Corporation (NYSE: WIN)




Kinder Morgan Energy (NYSE: KMP)








Altria Group (NYSE: MO)




Bristol-Myers Squibb (NYSE: BMY)




Source: Capital IQ, a division of Standard & Poor's. *2-year estimate.

These may not seem like the five most exciting companies, but that's the point. Sometimes the most unexciting, unexpecting companies are the ones that are less volatile but still have the ability to put cash in your pocket, in addition to growing over time. Not convinced yet? Take a look at what some simple investments would have done for you over the past five years:


Initial Investment

5-Year Annualized Gain*

Ending Investment





Kinder Morgan Energy












Bristol-Myers Squibb




*Compound annual growth rate

Over a very short time horizon of five years, you could have made more than a 50% gain by investing in these very ordinary-seeming stocks. Their success can be attributed to the fact that they held up well during the recession and continued to pay dividends, which ultimately played a big part in their gains. And this is during a time when the overall stock market was basically flat -- in fact, if you had invested $1,000 in a stock index fund, you most likely would have lost money!

Don't wait any longer
Despite last year's phenomenal rally in the market, investors this year have pulled billions of dollars out of stock funds and poured that hard-earned cash into bond funds. Considering the uncertainty in the market and in our economic future, it's an understandable response.

But trust me: Investing in individual stocks is the only way you can secure a path to a comfortable retirement. You may not get rich overnight, but allocating a good portion of your portfolio to dividend stocks will not only increase your wealth, but you'll sleep well knowing that your money is in good hands.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.