Invest in Dividend Aristocrat Stocks, Don't Speculate on Gold

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OG value investor Benjamin Graham, the intellectual force behind Warren Buffett, described an investor as one who sought to profit from the conditions of the company.  By contrast, according to Graham, a speculator was one who hoped to gain from the conditions of the market.  For speculators seeking to profit from buying gold, there also has to be the expectation that the "Greater Fool Theory" will prevail, too.

This is due to virtually all of gold being used for speculative purposes.  

There is very, very little investment value in gold as there is just not that much industrial demand for it.  Gold will never create a new product, meet a consumer need, provide a service, patent a technology or do anything useful economically like a company such as Coca-Cola (NYSE: KO), Wal-Mart (NYSE: WMT) or Abbot Laboratories (NYSE: ABT).  

The only way a speculator owning gold can gain is from the "Greater Fool Theory" playing out, which, "... is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to 'a greater fool'; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price."

About gold as an investment, in March 2011 when the main exchanged traded fund for it, SPDR Gold Shares (NYSEMKT: GLD), was trading around $140 (it is now over $170), Warren Buffett exclaimed that, “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States.  For $7 trillion dollars…you could have all the farmland in the United States, you could have about seven ExxonMobils (NYSE: XOM), and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the ExxonMobils.”

Summarizing his outlook on gold, The Oracle of Omaha stated that,"Gold has two significant shortcomings, being neither of much use nor procreative."

By contrast, Dividend Aristocrat Stocks such as ExxonMobil, Coca Cola, Wal-Mart and Abbot Laboratories offer everything that gold does not for an investor such as Buffett (and who does not want to be investor like Buffett?)  As Dividend Aristocrat Stocks, each has annually increased their dividend yield for at least the past 25 years.  As the chart below shows, all of these stocks surpass the average 2% dividend yield for a member of the Standard & Poor's 500 Index:

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XOM Dividend Yield data by YCharts

By contrast, gold is a classic "dead money" holding in that it offers no income stream.  SPDR Gold Shares does not have a dividend yield.  In addition, there is a history of growth and income for Dividend Aristocrat stocks.  Gold bulls claim that investing in the Yellow Metal is buying into a standard that secures a country against economic upheavals.  About this, Paul Krugman, the nobel prize winning economist remarked that, "Under the gold standard America had no financial panics other than in 1871, 1884, 1893, 1907, 1930, 1931, 1933 and 1933."

What is most ironic, and costly for those purchasing, is that gold is considered to be most attractive under adverse economic conditions.  The buyers consider it to be a safe haven asset, plowing money in when the stock market is weak.  That is, however, by far, the best time to buy equities (buy low, sell high).

Writing about this in The New York Times on October 16, 2008, the nadir of The Great Recession, Buffett, in an op-ed entitled, "Buy American.  I am." advised that, ""A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."

When others are fearful is the best time to be greedy; and wisely investing in Dividend Aristocrat Stocks such as Coca-Cola, Walmart, Abbot Laboratories and Exxon Mobil, not speculating on gold and hoping for a "greater fool" to come along.


Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Abbott Laboratories, The Coca-Cola Company, and ExxonMobil. Motley Fool newsletter services recommend The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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