Stocks as Good as Gold

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

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

In spite of gold's allure in volatile 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 that are as good as gold. In fact, many are even better.

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 Lucent (before it merged with Alcatel to form Alcatel-Lucent (NYSE:ALU)) and Ericsson (NASDAQ:ERIC) in the 1990s. But while these stocks were shinier than gold for a while, they grew dull after the bubble burst in 2000. Each stock shed more than 80% of its value in the ensuing years.

Ericsson wasn't necessarily a poor business; Alcatel-Lucent still has its share of warts. The reason for the shine growing dim was that conditions 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: 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 is generating cash. Just like gold, steady dividends protect investors from bear markets. But even better than gold, dividends also help boost returns.

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

*Return since 1995 spin-off.

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 352% over the trailing 15 years.

Each company above had a long operating history in a relatively stable sector, providing investors a defensive edge with low long-term risk. 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 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. 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 there is.

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 9 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 and owns shares of Alcatel-Lucent and ExxonMobil. Aflac is a Stock Advisor recommendation. Vanguard Windsor II is a Champion Funds pick. The Motley Fool's disclosure policy is pure 24 karat, through and through.