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 (NYS: 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.

At the time thisarticle was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.Motley Fool newsletter services have recommended buying shares of McDonald's. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.