Montreal, Canada

The world's greatest bond fund manager is bullish on utility stocks. Bill Gross, who runs the world's largest bond fund complex out of Newport Beach, California, is musing about the merits of owning relatively high-yielding utilities in late 2009.

Entitled "Anything but 0.01%," Gross's current deliberations on the PIMCO web site are worth reading. Gross points out that the Fed is stuck with current interest rates until employment and housing improve – and that won't happen anytime soon. He thinks investors could do much better than sinking cash into 0.01% money-markets and Treasury bills.

The bond king, who's flagship PIMCO Total Return Fund is up 14% this year, thinks utility stocks have further to run:

"Let me tell you what I'm doing. I don't have the long-term investment objectives of Berkshire Hathaway, so I'm sort of closer to an average investor in that regard. If that's the case, I figure, why not just buy utilities if that's what the future American capitalistic model is likely to resemble. Price wise, they're only halfway between their 2007 peaks and 2008 lows – 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6% not .01%! In a low growth environment, it seems to me that a company's stock should yield more than its less risky debt, and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunication companies now yield between 5 and 6%, whereas their 10- and 30-year bonds yield less and at a higher tax rate to you the investor."

As of this morning, the Dow Jones Utility Average is 29% off its all-time high and 34% above its multi-year low in March. The index yields an attractive 4.37% compared to 2% for the S&P 500 Index and trades at about 13 times historical earnings. In contrast, benchmark ten-year Treasury bonds yield 3.37% and return less on an after-tax basis than dividend-paying stocks.

Utilities, which trailed the broader market in the go-go 1980s and 1990s has zoomed past the S&P 500 Index in this rough decade – marked by two severe bear markets. The S&P 500 Utilities Index has returned a cumulative (including dividends) 52.6% since 2000 versus a loss of 10.8% for the S&P 500 Index.

For indexing, the iShares Utilities Select SPDR ETF (XLU) offers good liquidity and low fees.

While still on indexing I want to correct a segment of my column yesterday on year-end mutual fund and ETF taxes. Please note that most ETFs do not issue year-end capital gains; ETFs that focus on fixed-income/interest strategies typically make dividend payments monthly. If you're contemplating an ETF purchase you don't have to wait until January. But you should sit on the sidelines for mutual funds. Thanks to the reader who was kind enough to send me an email last night on this subject.