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

It's not hard to understand why. For 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 such as this, 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. Some stocks out there are as good as gold -- and many are even better.

Chasing shiny trinkets
As a new investor, I was drawn to 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 wore off after the bubble burst in 2000. Each stock shed more than 80% of its value in the ensuing years.

Ericsson and Palm weren't necessarily poor businesses -- though Palm started to show its competitive weakness soon after its debut. But the fundamental conditions just didn't support their stratospheric share prices at the time. 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. 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:


15-Year Performance

Merck (NYSE:MRK)


Energy Transfer Partners* (NYSE:ETP)


Valero Energy (NYSE:VLO)


Avon Products (NYSE:AVP)


Manulife Financial** (NYSE:MFC)


Chevron (NYSE:CVX)


S&P 500




*Return since 1997. **Return since 1999.

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 166% 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 past few years, the table above shows that dividend-paying stocks leave gold in the dust over extended time frames -- and the difference is even more dramatic as you look at longer time frames.

Consistent dividend payments to shareholders, even during the sort of economic tough times we're enduring today, have made many of these companies long-term winners. This 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 survive years of market turmoil, and through reinvesting, to make more money along the way. That's about the best hedge imaginable against economic bogeymen.

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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 owns no shares of companies mentioned here. The Motley Fool's disclosure policy is pure 24-karat, through and through.