Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Equity Lessons From Bill Gross--Part II

Another thing we learned about equities from Bill Gross was that in the twentieth century (at least the part for which records were kept), earnings per share of the Dow stocks grew only 0.6% a year faster than inflation.

So where did the real return (above inflation) come from? Putting aside the inflation-fighting aspect of capital gains, from dividends.

Put another way, U.S. blue chip stocks are glorified TIPS (Treasury Inflation Protected Securities). These are special bonds, whose principal fluctuates with "inflation" (the consumer price index), and also pay interest. This does not apply to small cap U.S. or international stocks.

Around the turn of the century, when TIPS were yielding 3%, and the Dow was yielding only 2%, TIPS were clearly the vehicle of choice. Now that the Dow's yield has has widened above 3%, while TIP yields are closer to 0%, the choice isn't so clear.

This vindicates the theories of Ben Graham, who considered stocks a special (junior) form of bonds. Although they are less safe, the main advantage of stocks is that they provide an inflation fighter, and bonds  don't. (U.S. TIPS, which have been around for only a decade, didn't exist in Graham's time.)