Diageo (NYSE:DEO), the world's leading beer, wine, and spirits company, with brand names such as Smirnoff, Johnnie Walker, and Guinness, turned in disappointing first-half results yesterday -- a 2% drop in net sales and profits.

While a weak dollar and other factors hurt earnings, volume, or units sold, increased 3%; operating margins increased 0.6% to a healthy 23.9%; and return on invested capital rose 0.3% to a more than respectable 17.9%. This is the 10th consecutive reporting period with improvements in these three measures. Bravo!

Diageo trades for 17 times earnings -- and 15 times forward earnings for the fiscal year ending in June 2006. One reason for that lower-than-market average multiple is $9.3 billion in debt -- which sits at a lofty 122% of equity. For comparison, more broadly diversified competitor Brown-Forman (NYSE:BFB) has a net debt of $572 million (55% of equity) and trades for a more robust 20 times trailing earnings.

Although the company has $2.9 billion in cash to keep the operations purring, slow revenue growth and big debt produces anemic stock price appreciation -- such as the 3.5% the stock has increased over the last 52 weeks.

So why did Mathew Emmert make Diageo a Motley Fool Income Investor recommendation in April 2004? Besides a great dividend -- it's 4.4% now -- the company had the highest net margins in the alcoholic beverage industry. Said another way, Diageo is a fat cash cow that can grow, service its debt, and keep rewarding shareholders.

The stock was a fine pick, too. While the Standard & Poor's 500 has returned 0.2% since this recommendation was made, Diageo has returned 8.6% -- a clear showing that dividends really can matter.

The market liked yesterday's earnings news and has sent the stock up almost 2% to $57.50 a share today. That's good news. The company is still trading below the $60 per share that Emmert estimates it is worth -- and the dividend beats the returns at your local bank.

Want to know what Mathew Emmert is recommending now? Try a free trial to the Motley Fool Income Investor newsletter.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy .