GNU diff has the -y option that already does side-by-side diffs; I'm a bit surprised that it doesn't do colouring already.
http://i.imgur.com/VOlbMoy.png
icdiff seems to have the best defaults for me.
cdiff() {
diff -u "$@" \
| sed 's/^\(@@ .* @@\)$/'$'\e[36m''\1'$'\e[m''/g' \
| sed 's/^\(-.*\)$/'$'\e[31m''\1'$'\e[m''/g' \
| sed 's/^\(+.*\)$/'$'\e[32m''\1'$'\e[m''/g' \
| less -c -R
}icdiff colors just the part of the line that changed: http://www.jefftk.com/icdiff-comparison-1234a1234.png
Not that this applies here, but it is something to consider.