Bill Gross: Equity Analyst?

Bill Gross saved the best for last during his keynote address at this year's Morningstar Investment Conference.

Early in his talk, the PIMCO chief pointed out that, as the tailwind provided by the Fed's aggressively accommodative monetary stance subsides, stocks will be left to suffer the slings and arrows of rising real interest rates, as well as the higher inflation that Gross (among many others) thinks the Fed may be engineering to help the U.S. inflate its way out of debt.

Yet, on their own or not, some companies--and the funds that invest in them--wouldn't merely survive that double whammy; they and their investors could thrive. Near the end of his talk, Gross--who manages nearly $250 billion in fixed-income assets at PIMCO Total Return PTTAX alone--turned equity analyst, calling out a clutch of companies that he thinks could fare well amid the coming quantitative unease.

Cold Stock Tips
Gross also aired his views in an interview with CNBC at the conference, mentioning  Procter & Gamble PG, Johnson & Johnson JNJ, and pair of utility concerns, Southern Company SO and Duke DUK. In Gross' view, each is an attractive option for income seekers, given their generous yields relative to the paltry payouts currently available with Treasuries.

"There's a huge gap and a huge differential," Gross said, "if an investor is willing to take a minor downgrade in terms of credit."

That's sound advice, but chances are you already have stakes in those companies through the mutual funds you own. Large-cap stalwarts all, they reside in the top fourth of the S&P 500's components. They're well represented in the portfolios of several widely held, topnotch mutual funds, too.

Vanguard Wellington VWELX and Davis NY Venture NYVTX, for example, rank among the major shareholders of Procter & Gamble. American Funds Income Fund of America AMECX and T. Rowe Price Equity & Income PRFDX--which weigh in with asset bases of $72.1 billion and $23.1 billion, respectively--are big owners of Duke. And needless to say, all the stocks Gross mentioned soak up ample assets at S&P tracker Vanguard 500 Index VFINX, whose massive asset base tops $110 billion.

To say that Gross' recommendations are already widely held would be a similarly massive understatement.

Out-of-Index Alternatives
Mutual fund investors who buy Gross' advice but who don't want to buy additional exposure to his stock picks have plenty of compelling options: choice funds whose above-average payouts owe partly to their major stakes in financially healthy dividend payers with little to no representation in the S&P 500.

Thornburg Investment Income Builder TIBAX provides a case in point. A world-allocation offering currently yielding more than 5%, the fund's domestic-equity sleeve, which comprises roughly 27% of assets, bypasses the companies mentioned above but includes asset manager AllianceBernstein AB. Indeed, the Thornburg fund is among that shop's top shareholders. AllianceBernstein's dividend history is admittedly lumpy. Still, its lowest year-end dividend yield during the past five years exceeds 4%. Given the company's Grade A financial health and, per Morningstar Equity Research, wide economic moat, its payouts look sustainable, too.

The yield at Dodge & Cox Balanced DODBX isn't quite as plump as the Thornburg fund's. At roughly 2%, though, it does surpass the S&P 500's, thanks in part to its status as one of the top fund owners of semiconductor concern Maxim Integrated Products MXIM. A mid-cap stalwart, Maxim boasts a steadily rising dividend history, topnotch financial health, and a wide-moat rating. The stock currently yields 3.4%, and the Dodge complex is a big owner. The shop has trimmed its positions of late, but its total, firmwide stake in Maxim Integrated exceeds 12% of the company's shares.

Risk-Aware
Gross framed his stock recommendations in a particular way: as Treasury alternatives for yield-seeking investors who would otherwise have a portion of their portfolios in Treasuries or other high-quality U.S. bonds.