I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I’d love to hold it, but one thing is stopping me from buying it at the moment.

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Spirits maker Diageo (LSE: DGE) has been one of my favourite FTSE 100 stocks for the last decade or so. I held it for several years in that time, and sold at a 70% profit. I wish I hadn’t, frankly.

At that point, I hadn’t grasped the point of long-term investing. Today, I buy FTSE 100 stocks with the aim of holding them to retirement and beyond. I reinvest my dividends to pick up more stock today, to generate even more passive income when I retire.

I’ll soon be buying Diageo

Next time I buy Diageo – and there will be a next time, soon – it will be with that goal in sight. This is a stock for all seasons, and recent performance has underlined that.

Over the last 12 volatile months, Diageo shares have climbed by 8.45% while the FTSE 100 as a whole fell 3.93%. Measured over five years, Diageo is up 56.65%. The FTSE 100 is down 6.70% over the same period.

Diageo has thrashed the index over both time scales. It has a habit of doing that. Many see this as a defensive stock, because alcohol sales tend to hold up in a recession as people drown their sorrows. It does just as well in the good times, when drinkers have something to celebrate. Few FTSE 100 stocks can boast such an impressive double selling point.

In July, Diageo posted a 21.4% jump in full-year sales to £15.5bn, with double-digit growth across all regions. That’s incredible, given that it operates in almost every country in the world. Demand was “resilient”. Better still, its premium brands have pricing power, allowing Diageo to pass on extra costs to consumers.

Those figures were enhanced by a post Covid bounce, as lockdowns eased and drinkers could get out of the house. Then again, people carried on drinking scotch, tequila, and beer at home during lockdown. What did I say about the other being a stock for all seasons?

Let’s not get carried away, because Diageo faces headwinds, too. CEO Ivan Menezes recently warned of “significant cost inflation, a potential weakening of consumer spending power and global geopolitical and macroeconomic uncertainty”

Here’s what’s holding me back

A big downside for an income investor like me is that its dividend yield is well below the current FTSE 100. Today, the average stock on the index yields 4.15%. Diageo would give me just half that at 2.02%. The FTSE 100 trades at around 14 times earnings, but Diageo is valued at a thumping 25.17 times.

I have followed Diageo long enough to know this is par for the course. It always has a relatively low yield and high valuation. That’s the price of popularity, and the reason I wouldn’t buy it today.

I don’t think it’s overpriced, given its quality. My issue is that right now, a host of other FTSE 100 stocks are trading at dirt-cheap valuations, while also offering mind-boggling yields. It’s an amazing opportunity and I’ll start by purchasing them first.

I’d do anything to hold Diageo in my portfolio, but I wouldn’t turn my nose up at today’s amazing FTSE 100 bargains.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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