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 Ericsson in the 1990s or Palm (Nasdaq: PALM) at its IPO in 2000. 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 following years and has made little progress in recovering since.

Ericsson and Palm weren't necessarily poor businesses -- though Palm started to show its competitive weakness soon after its debut. 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:

Company

15-Year
Performance

Barclays (NYSE: BCS)

477%

Dow Chemical (NYSE: DOW)

201%

Valero Energy (NYSE: VLO)

2,367%

Avon Products (NYSE: AVP)

702%

Manulife Financial* (NYSE: MFC)

600%

Chevron (NYSE: CVX)

639%

S&P 500

180%

Gold

145%

*Return since 1999 IPO.

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 305% 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 companies 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 no shares of companies mentioned here. Dow Chemical is an Income Investor recommendation. Vanguard Windsor II is a Champion Funds recommendation. The Fool's disclosure policy is pure 24 karat, through and through.