Stocks for the Long Run: McDonald's vs. the S&P 500

Investing isn't easy. Even Warren Buffett councils that most investors should invest in a low-cost index like the S&P 500. That way, "you'll be buying into a wonderful industry, which in effect is all of American industry," he says.

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how members of the S&P 500 have performed compared with the index itself.

Step on up, McDonald's (NYSE: MCD  ) .

McDonald's shares have simply crushed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares returned an average of 16.9% a year, compared with 11.1% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1980 would be worth $29,400 today. In McDonald's, it'd be worth $146,500.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up 38% of McDonald's total returns. For the S&P, dividends account for 41.5% of total returns.

And now have a look at how McDonald's earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

Again, significant outperformance. Since 1995, McDonald's earnings per share have grown by an average of 10.4% a year, compared with 6% a year for the broader index. That's testament to the power of the company's brand, its incredible growth in global territories, and a push to revamp its menu over the last decade.

That earnings-growth dynamic has led to above-average valuations. McDonald's has traded for an average of 22.1 times earnings since 1980, compared with 21.3 times for the S&P.

The company has been, without a doubt, an above-average performer historically.

The question is whether that can continue. That's where you come in. Our CAPS community currently ranks McDonald's with a five-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add McDonald's to My Watchlist.