Investing isn't easy. Even Warren Buffett counsels 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, Southern Company
Southern Company 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 16.2% 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 Southern Company, it'd be worth $122,100.
Dividends accounted for a lot of those gains. Compounded since 1980, dividends have made up a staggering 94% of Southern Company's total returns. For the S&P, dividends account for 41.5% of total returns.
Now have a look at how Southern Company earnings compared with S&P 500 earnings:
Source: S&P Capital IQ.
Maybe surprisingly given shareholder returns, but there's underperformance. Since 1995 Southern Company's earnings per share have grown by an average of 2.2% a year, compared with 6% a year for the broader index. This is pretty standard for utilities. Earnings growth tends to match inflation and not much else.
What's it all meant for valuations? Southern Company has traded for an average of 15 times earnings since 1980 -- below the 21 times earnings for the broader S&P 500. It's that low valuation that has supercharged returns, as a high dividend yield compounded quickly when dividends were reinvested.
Through it all, Southern Company shares have clearly been 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 Southern Company with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Southern Company to My Watchlist.
Fool contributor Morgan Housel owns shares of Southern Company. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Southern. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
More from The Motley Fool
In Your 70s? 2 Boring, High-Yield Stocks You Might Want to Buy
If you're in your eighth decade of life, preserving capital is just as important as income. Here are two companies that can help with that.
70 or Older? 2 Stocks You Should Consider Buying
Security and growing dividends are what this pair of high yielders offer.
4 Stocks With Embarrassingly Unsustainable Dividends
Payouts to shareholders of ExxonMobil, Royal Dutch Shell, Southern Company, and Six Flags Entertainment are out of balance with the state of their earnings.