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Stocks 50 Times Better Than Gold

If there's a universal truth in investing, it's this: Anytime everyone believes something will happen, the opposite happens. When everyone thinks yin, markets go yang. Just ask the house flipper, the dot-com shareholder, or anyone who "invested" in a Beanie Baby.

When the whole market zigs, you should zag. And right now, the market is practically zigging all over itself for gold, the price of which hit a new record high in November. That news caught the eye of a couple of Bloomberg reporters in December; they pointed out that gold had returned only 44% since its last peak back in January 1980.

50 times better 
If you're thinking a 44% return for nearly 30 years' worth of investment sounds pretty meager, you'd be right. You'd have done better with your money just sitting in a plain old checking account. Even more dramatically, consider stocks. If you'd instead invested in the S&P 500 and reinvested your dividends, your investment over the same time would have risen 22-fold. Put another way, you'd have done about 50 times better with stocks than with gold.

That stat gets under the skin of forward-looking gold bugs, who believe that some mix of America's fiat currency, aggressive monetary policy, and epic deficit spending could make for gut-wrenching inflation.

That economic cluster bomb would be a boon for gold and hard assets at large, so the thinking goes, as they'd retain their relative value in the face of extreme inflation.

The best of both worlds 
I don't think gold investors are wrong to have those concerns -- just that they're making the wrong trade on them. There's a far better one based on the same concerns.

Consider the following facts:

  1. Gold is predominantly used as a store of value – not a generator of value.
  2. Stocks have crushed gold returns over the long haul.
  3. Dividend-paying stocks have outperformed non-dividend payers.

Returns of dividend-paying stocks haven't just beaten non-payers: They've crushed them. According to robust research by Wharton's Jeremy Siegel, portfolios of the highest-yielding stocks returned 4.8 percentage points higher annually, with less risk than baskets of the lowest-yielding stocks, over the years 1958 to 2002.

Higher returns, lower risk 
That's all pretty simple, and the fact that dividend payers are market-crushers is of little surprise to Motley Fool Income Investor members. But here's where gold comes in. You're concerned about deficit-driven inflation leading to rampant inflation? Fine. But don't invest directly in gold, or even first-tier gold producers like Kinross Gold  (NYSE:  KGC  )  or Yamana Gold  (NYSE: AUY  ) .

Instead, consider shares of high-quality, high-payout producers of necessary industrial commodities, which should also benefit from the same inflationary factors that would drive up the price of gold.

Think of what an ExxonMobil is to oil, an Ultra Petroleum to natural gas, or a PotashCorp to potash. Not to mention what Compass Minerals is to salt. Income Investor's James Early and I like to think of Compass as possibly the best little commodity play you've never heard of.

The best of both worlds 
Compass has quietly destroyed the market over the past five years, by selling two commodities you likely pay no mind to: salt and sulphate of potash (SOP), which is used in high-end specialty fertilizers. Compass is the largest salt producer in the U.S. and the U.K., and it practically mints cash by producing SOP at its low-cost solar evaporation ponds at the Great Salt Lake.

Unlike your typical natural-resource producer, Compass doesn't have to pour cash into finding new reserves: The company estimates it has nearly 100 years of reserves at most of its production locations. Incredibly, the same is also true of its potash reserves. Talk about a store of value. And on the inflation hunt, recognize that Compass has been able to raise prices at 3% to 4% a year over the past couple of decades, and it passed on another increase just last week.

Stocks 2010 
Not even factoring in its nifty value as an inflation hedge, Compass boasts three of the key criteria that James and his team at Income Investor seek out:

  1. Big dividends. Not only has robust empirical research proven that dividend payers outperform over the long run, but they pay you while you wait. The average Income Investor recommendation yields 4.1%.
  2. Big upside. We like to have our cake and eat it, too, recommending high yielders with lots of capital gains potential.
  3. Big moats. We're looking for businesses with multi-decade staying power. Cases in point: Southern Company (NYSE: SO  ) and Diageo (NYSE: DEO  ) , two of only six stocks on Income Investor's Buy First list.

Compass is James' recommendation in the Fool's flagship annual special report, Stocks 2010. His recommendation from last year's report, Tenaris SA (NYSE: TS  ) , which we co-wrote, is up about 119%. Stocks 2009 was a banner report for us, with all nine of our analyst team's recommendations -- including other major winners such as Netflix (Nasdaq: NFLX  ) and Dolby Laboratories (NYSE: DLB  ) -- besting the market by an average of 59.3%.            

Two for the price of one 
You can read more about Compass Minerals and the nine other stocks featured in Stocks 2010, which comes free with new memberships to Income Investor. The average Income Investor recommendation has outperformed the market by 7 percentage points since the service's inception back in 2003. Just click here to try Income Investor -- you can cancel at any time.

This article was originally published on Dec. 14, 2009. It has been updated.

Senior Analyst Joe Magyer's favorite metal is Rearden metal. He owns shares of Southern Company and Diageo, both of which are Income Investor recommendations. Netflix and Dolby Laboratories are Stock Advisor recommendations. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2010, at 4:12 AM, saddleupster wrote:

    Highest dividend yielding stocks top 250:

    Dow Jones Industrial highest dividend stocks top 30:

  • Report this Comment On January 28, 2010, at 6:51 PM, XMFSinchiruna wrote:

    I hope you won't mind a little well-intentioned counterpoint from a fellow Fool. :)

    Like anything else, the trick is to buy low and sell high. If you take it back another decade, and use $35 gold as a starting point, the comparative picture looks dramatically different. Cherry-picking as a starting point the biggest price spike in modern history will of course yield your desired result. :)

    The federal funds rate approached 18% in 1980 ... buyer beware.

    On a more fundamental level, comparing stocks to gold misses the point. It's not a question of either / or... but one of side-by-side allocation. Conventional wisdom guided for 5% to 10% gold bullion allocation even during normal times, but as the notion of gold as a "barbarous relic" took hold, that practice faded. Even simply reviving that conventional wisdom in light of what we now know about the persistent risks within the financial system could greatly enhance the security of a well balanced portfolio.

    And since you love dividends as much as I do, consider this: During the Great Depression, gold mining stocks were generous dividend payers, with companies like Homestake Mining doling out a total of $128 per share in dividends between 1929 and 1935. I anticipate healthy dividends to emerge from the sector as the march toward $2,000 gold continues. In some cases, those dividends may become the stuff of legend as they did with Homestake.

    Thanks for hearing me out! Fool on!

  • Report this Comment On February 03, 2010, at 5:51 AM, zipdude53 wrote:

    ts how high will it go

  • Report this Comment On January 07, 2015, at 2:35 PM, dynaruzacaj wrote:

    Gold is a much better hedge against the stock market than bonds. When rates rise, you will lose money. I would much prefer to be in an asset that is likely to appreciate. I moved a big chunk of my retirement to physical gold. Gramercy Gold sells below market value when you open an account. This is going to be a much better diversification strategy than fixed income, which is sure to lose.

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