For years, one popular investment has delivered amazing returns to investors. Even in the face of punishing bear markets, financial crises, and the bursting of numerous bubbles, this investment has pushed almost inexorably higher.

You won't find that investment in the stock market because it's not a stock. Rather, U.S. Treasury bonds have put in strong performance that puts broad domestic stock market indexes to shame. So if Treasuries have done so well, why is one of the most famous bond investors in the world saying that their time is over?

Going against the grain
Addressing Morningstar's 2011 Investment Conference, Pimco's Bill Gross is convinced that investing in Treasuries just doesn't make sense right now. According to Gross, what has driven double-digit returns from bond funds in the past is the dramatic drop in interest rates over time.

To Gross, it's a simple matter of math. In the early 1980s, with Treasuries making double-digit percentage interest payments to bondholders, the taming of inflation forced interest rates to fall over time, bringing big capital gains to those who invested in long-term Treasuries. But now, with rates on 10-year Treasuries at 3%, the potential gains even if bond yields did fall further are much more limited.

Even worse, real interest rates -- that is, rates after taking inflation into account -- have fallen to "staggering" levels. With inflation-indexed bonds with maturities as long as six years from now carrying negative real yields, investors are agreeing to the guaranteed loss of purchasing power when they buy bonds.

Winners and losers
So if the bond king is saying that bonds are doomed, what should you do? Investors have several choices. In contrast to the U.S., other countries aren't seeing their bonds ravaged by negative real returns. Gross points to Brazil, Canada, and Mexico as potential candidates for investment, but a more diversified portfolio of foreign bonds may make you feel less exposed to individual countries. The closed-end funds Templeton Global Income (NYSE: GIM) and Templeton Emerging Markets Income (NYSE: TEI) offer broad-based holdings of foreign debt, while the more focused Aberdeen Asia-Pacific Income Fund (AMEX: FAX) concentrates largely on Australian bonds.

Gross also reiterated his opinion that dividend-paying blue chip stocks were a better bet than bonds. He suggested some individual stock names, including Coca-Cola (NYSE: KO) and Procter & Gamble, are apt to pay better real yields than short-term bonds while giving investors relative stability. Again, investors seeking more diversification may prefer dividend ETFs iShares DJ Select Dividend (NYSE: DVY) or Vanguard High Dividend Yield (NYSE: VYM) for their less-concentrated investment strategies.

But beyond bonds themselves, investors need to be careful of companies that themselves are exposed to the bond market. For instance, Bloomberg recently reported that JPMorgan Chase (NYSE: JPM) has invested heavily in the mortgage-bond market, trying to put cash to work at somewhat higher rates. Yet if Treasury prices fall, mortgage bonds will almost certainly follow suit, bringing losses to the bank.

Of course, without knowing the exact composition of the banks' bond portfolios, it's impossible to gauge how risky they might be. But bank investors should look more closely at what banks are doing with their cash reserves to make sure they're comfortable with any risk involved.

Hedge your bets
Treasury bonds have been a winning investment for many people for a long time. It's always hard to give up on a winner, but if Bill Gross can do an about-face on the asset class that has brought him fame and fortune, then you can, too.

If you like Gross' ideas about making money from dividends, be sure to read the Fool's recommendations of 13 high-yielding dividend stocks. The report is free, but the information is priceless.

Fool contributor Dan Caplinger hasn't liked bonds since they stopped paying decent yields. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Coca-Cola and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.