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 individual stocks have performed against the broad S&P 500.
Step on up, Paychex (NAS: PAYX) .
Paychex shares have simply crushed the S&P 500 over the past quarter-century:
Source: S&P Capital IQ.
Since 1987, shares have returned an average of 18.6% a year, compared with 9.7% a year for the S&P (both include dividends). That difference adds up fast. One thousand dollars invested in the S&P in 1987 would be worth $19,200 today. In Paychex, it'd be worth $236,780.
Dividends accounted for a lot of those gains. Compounded since 1987, dividends have made up about half of Paychex's total returns. For the S&P, dividends account for 39% of total returns.
Now have a look at how Paychex earnings compare with S&P 500 earnings:
Source: S&P Capital IQ.
Again, huge outperformance. Since 1995, earnings per share have increased by an average of 17.3% per year, compared with 6% annual growth for the broader index.
What's that meant for valuations? Paychex has traded for an average of 49 times earnings since 1987 -- well above the 24 times earnings average of the S&P 500. It's far different today, however. Paychex currently trades for about 19 times earnings.
Through it all, shares have been strong performers over the last quarter-century.
Of course, the important question is whether that will continue. That's where you come in. Our CAPS community currently ranks Paychex with a four-star rating (out of five). Do you disagree? Leave your thoughts in the comment section below, or add Paychex to My Watchlist.
The article Stocks for the Long Run: Paychex vs. the S&P 500 originally appeared on Fool.com.
Fool contributorMorgan Houselowns shares of Paychex. Follow him on Twitter,@TMFHousel.Motley Fool newsletter serviceshave recommended creating a write covered straddle position in Paychex. We Fools don't 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. The Motley Fool has a disclosure policy.
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