Stocks As Good As Gold

Even at the mere mention of gold, associations with value, stability, and growth immediately pop into my head. This is largely thanks to the decades that the precious metal has been marketed as an attractive investment and a great way to hedge inflation, recession, and almost every other economic bogeyman.

The reality, though, is that regardless of the relative stability of gold in down times, the long-term performance of gold lags stocks by a significant margin. But investors don't need to give up the shiny lure of stability just to earn better returns in stocks -- there are stocks out there that really 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 has made little progress in recovering since.

These companies weren't necessarily poor businesses -- the fundamental conditions just didn't support the share price. I would have been far better off had I understood what demented guru Jeremy Siegel pointed out in his book The Future for Investors -- that dividend-paying stocks are ultimately the best place for long-term cash.

You can have it all
A significant stabilizing factor in the return of stocks is the dividend that it pays to shareholders, as it helps smooth out the ups and downs of the market over time and indicates a company that'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 these dividend-paying stocks and how they have performed through the turbulence of the recent bubble:

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 129% over the trailing decade.

And let's be honest: Investors wouldn't have needed an advanced degree to find the above companies 10 years ago. Each had a long operating history in a relatively stable sector, providing investors a defensive edge with low long-term risk. And, with few exceptions, the management of each company has maintained (and sometimes even raised) dividend payments to shareholders during previous down economic cycles.

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 nearly four 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. The longtime Fool is author of The Qualcomm Equation. He owns no shares of companies mentioned here. Bank of America is an Income Investor recommendation. Vodafone and Colgate-Palmolive are Inside Value recommendations. The Motley Fool's disclosure policy is pure 24 karat, through and through.