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Stocks as Good as Gold

At the very mention of gold, ideas of value, stability, and growth immediately pop into my head.

This is largely thanks to the decades for which the precious metal has been marketed as an attractive investment, and as a great way to hedge inflation, recession, and almost every other economic bogeyman.

But regardless of gold's allure in down times, the true long-term performance of gold lags stocks by a significant margin. But investors don't need to give up the shiny lure of stability to earn better returns in stocks -- there are stocks out there that are as good as gold. In fact, many are even better than gold.

Chasing shiny trinkets
As a new investor, I was drawn to the allure of growth. This led me to buy -- or seriously consider buying -- shares in tech darlings such as 3Com (Nasdaq: COMS  ) and Level 3 Communications (Nasdaq: LVLT  ) in the 1990s. But while these stocks were shinier than gold for a while, the luster wore off after the bubble burst in 2000. Each stock shed more than 80% of its value in the ensuing three years, and they've made little progress in recovering since.

Not that these companies are poor businesses -- the fundamental conditions just didn't support the extreme share price at the time. I would have been far better off had I understood what demented guru Jeremy Siegel pointed out in his book, The Future for Investors: Regular investments in stable, dividend-paying stocks are ultimately the best place for long-term cash.

You can have it all 
Dividend payments to shareholders are a significant stabilizing factor in a stock's return; because they help smooth out the ups and downs of the market over time, and they indicate that the company's generating cash. Just like gold, steady dividends protect investors from bear markets. But even better than gold, dividends also help boost returns.

For instance, take a look at the long-haul performance of these dividend-paying stocks:


20-Year Return

Bank of America (NYSE:BAC)


Colgate-Palmolive (NYSE:CL)


Abbott Labs (NYSE:ABT)






S&P 500




*Return calculated from December 1988.

Now, lest I be accused of cherry-picking these examples, consider this: The Vanguard Windsor II (VWNFX) fund, our proxy for stocks with above-average yields, returned a market-beating 812% over the trailing two decades.

And even though banking stocks like Citigroup and Bank of America have been pummeled lately, they have still far outpaced investments in gold over the long term. Even with the dramatic increase in the price of gold in the last few years, the table above shows that dividend-paying stocks leave gold in the dust over more extended time frames.

To their advantage, many of these stocks have maintained (and sometimes even raised) dividend payments to shareholders during previous down economic cycles -- with Citigroup being a recent exception. This consistency of a cash yield helps boost shareholder returns in the company, because more shares are purchased when the stock is depressed. One crucial point, though: To realize the full benefits these stocks provide, investors must reinvest the dividends.

Regain your luster
Dividend-paying stocks give investors the ability to not only survive years of market turmoil, but, through reinvesting, to make more money along the way. That's about the best hedge against economic bogeymen I can think of.

If you're short on time or ideas, the Motley Fool Income Investor service is a great place to find dividend payers -- the average recommendation is beating the S&P by more than seven percentage points and offers more than a 4% yield. You can click here for a free 30-day trial to see the team's top dividend stocks for right now.

This article was originally published on July 18, 2007. It has been updated.

Fool contributor Dave Mock still has a soft spot for gold, but satisfies it with dividend stocks. He is the author ofThe Qualcomm Equation. He owns no shares of companies mentioned here. Colgate-Palmolive is an Inside Value recommendation and Bank of America is an Income Investor pick. Vanguard Windsor II is a Champion Funds pick. The Motley Fool's disclosure policy is pure 24 karat.

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