Stocks as Good as Gold

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 these, 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 Sun Microsystems (NASDAQ:JAVA) and Motorola (NYSE:MOT) 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% from its 2000 peak in the 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: 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:

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 296% over the trailing 20 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.

With many solid stocks being beaten down with the market, the Motley Fool Income Investor service is awash with great stock ideas. The average recommendation is beating the S&P by two percentage points, while offering more than a 7% yield. Before you cash out your portfolio and stuff it all into gold, click here for a free 30-day trial of the service. There's nothing to lose. I'm betting you'll take a shine to at least a few high-yielding recommendations.

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 shares of Motorola and Johnson & Johnson, which is a Motley Fool Income Investor recommendation. Home Depot is an Inside Value selection. Vanguard Windsor II is a Champion Funds pick. The Motley Fool owns shares of Procter & Gamble. The Fool's disclosure policy is pure 24-karat, through and through.