Stocks 50 Times Better Than Gold

If there's a universal truth in investing, it's this: Anytime everyone believes something will happen, the opposite happens. When everyone thinks yin, markets go yang. Just ask the house flipper, the dot-com shareholder, or anyone who "invested" in a Beanie Baby.

When the whole market zigs, you should zag. And right now, the market is practically zigging all over itself for gold, whose price hit a new record high this month. That news caught the eye of a couple of Bloomberg reporters last week, who pointed out that gold had returned only 44% since its last peak back in January 1980.

50 times better
If you're thinking a 44% return for nearly 30 years worth of investment sounds pretty meager, you'd be right. You'd have done better with your money just sitting in a plain ol' checking account. Even more dramatic, consider stocks. If you'd instead invested in the S&P 500 and reinvested your dividends, your investment over the same time would have risen 22-fold. Put another way, you'd have done about 50 times better with stocks than with gold.

That stat gets under the skin of forward-looking gold bugs, who believe that some mix of America's fiat currency, aggressive monetary policy, and epic deficit spending could make for gut-wrenching inflation.

That economic cluster bomb would be a boon for gold and hard assets at large, so the thinking goes, as they'd retain their relative value in the face of extreme inflation.

The best of both worlds
I don't think gold investors are wrong to have those concerns -- just that they're making the wrong trade on them. There's a far better one based on the same concerns.

Consider the following facts:

1. Gold is only a store of value -- it doesn't spin off cash or pay dividends.
2. Stocks have crushed gold returns over the long haul.
3. Dividend-paying stocks have outperformed non-dividend payers.

Returns of dividend-paying stocks haven't just beaten non-payers: They've crushed them. According to robust research by Wharton's Jeremy Siegel, portfolios of the highest-yielding stocks returned 4.8 percentage points higher annually, with less risk than baskets of the lowest-yielding stocks, over the years 1958 to 2002.

Higher returns, lower risk
Pretty simple, and the fact that dividend payers are market-crushers is of little surprise to Motley Fool Income Investor members. But here's where gold comes in. You're concerned about deficit-driven inflation leading to rampant inflation? Fine. But don't invest directly in gold, or even first-tier gold producers like Barrick Gold (NYSE:ABX) or Goldcorp (NYSE:GG).

Instead, consider shares of high-quality, high-payout producers of necessary industrial commodities which should also benefit from the same concerns that would benefit from drivers of gold prices.

Think of what an ExxonMobil (NYSE:XOM) is to oil, an Ultra Petroleum (NYSE:UPL) to natural gas, or a PotashCorp (NYSE:POT) to potash. Ah, and what Compass Minerals (NYSE:CMP) is to salt. Income Investor's James Early and I like to think of Compass as possibly the best little commodity play you've never heard of.

The best of both worlds
Compass has quietly destroyed the market over the past five years selling two commodities you likely pay no mind to: salt and sulphate of potash (SOP), which is used in high-end specialty fertilizers. Compass is the largest salt producer in the U.S. and the U.K., and it practically mints cash by producing SOP at its low-cost solar evaporation ponds at the Great Salt Lake.

Unlike your typical natural-resource producer, Compass doesn't have to pour cash into finding new reserves: The company estimates it has nearly 100 years of reserves at most of its production locations. Incredibly, the same is also true of its potash reserves. Talk about a store of value. And on the inflation hunt, recognize that Compass has been able to raise prices at 3%-4% a year over the past couple of decades, and it passed on another increase just last week.

Stocks 2010 
Not even factoring in its nifty value as an inflation hedge, Compass boasts three of the key criteria that James and his team at Income Investor seek out:

1. Big dividends. Not only has robust empirical research proven dividend payers outperform over the long run, but they pay you while you wait. The average Income Investor recommendation yields 4.1%.  
2. Big upside. We like to have our cake and eat it, too, recommending high yielders with lots of capital gains potential.
3. Big moats. We're looking for businesses with multidecade staying power. Case in point: Coca-Cola (NYSE:KO), which is one of only six stocks on Income Investor's Buy First list.

Compass is James' recommendation in the Fool's flagship annual special report, Stocks 2010. His recommendation from last year's report, Tenaris SA, which we co-wrote, rose nearly 89% over the year. I think you'll agree we've had a pretty good run with these reports over the years:

Returns data as of 11/5/09.

Two for the price of one
You can read more about Compass Minerals and the nine other stocks featured in Stocks 2010, which comes free with new memberships to Income Investor. The average Income Investor recommendation has outperformed the market by seven percentage points since the service's inception back in 2003. Just click here to try Income Investor -- you can cancel at any time.

Senior Analyst Joe Magyer's favorite metal is Rearden metal. He has no financial interest, long or short, in any companies mentioned in this article. Or gold, for that matter. Coke is both an Income Investor and Inside Value recommendation. Marvel, Netflix, and Quality Systems are Stock Advisor selections. BioMarin is a Rule Breakers pick. The Motley Fool has a disclosure policy.