Stocks for the Long Run: Diageo vs. the S&P 500

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

But there are, of course, companies whose long-term fortunes differ substantially from the index. In this series, we look at how individual stocks have performed against the broad S&P 500.

Step on up, Diageo (NYSE: DEO  ) .

Diageo shares have easily outperformed the S&P 500 over the last three decades:

Source: S&P Capital IQ.

Since 1980, shares have returned an average of 14.5% 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 Diageo, it'd be worth $76,229.

Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up about 70% of Diageo's total returns. For the S&P, dividends account for 41.5% of total returns.

Now have a look at how Diageo earnings compare with S&P 500 earnings:

Source: S&P Capital IQ.

There's some underperformance here. Since 1995, earnings per share have grown by an average of 4.2% a year, compared with 6% annual growth for the broader index.

What's that meant for valuations? Diageo has traded for an average of 18 times earnings since 1980 -- a bit below the 21 times earnings average of the S&P 500.

Through it all, shares have been strong outperformers over the last three decades.  

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