Even at the mention of gold, ideas of 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 allure 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 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 Sun Microsystems (Nasdaq: JAVA) and Level 3 Communications in the 1990s. But while these stocks were shinier than gold for a while, the luster soon wore off. Each stock shed more than 80% of its value in the few following 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: Stable, 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 over the long term:


20-Year Return

Caterpillar (NYSE: CAT)


Procter & Gamble (NYSE: PG)


Johnson & Johnson (NYSE: JNJ)


General Electric


Wrigley (NYSE: WWY)


S&P 500




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 875% over the trailing two decades.

Granted, the price of gold has made a dramatic run in the last several years and has returned more than many dividend-paying stocks in the past five- or even 10-year terms in some cases. But as the table illustrates, dividend paying stocks leave gold in the dust over extended time frames.

The advantage these stocks have is that many of them have maintained (and sometimes 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 six 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 shares of Wrigley, and Johnson & Johnson, which are both Income Investor recommendations. Vanguard Windsor II is a Champion Funds pick. The Motley Fool's disclosure policy is pure 24 karat, through and through.