So, I've updated this with more complete information...

1. In ...\GOG\Diablo\dx is another copy of Diablo 1 - but, with some Microsoft DirectX stuff

2. Execute ...\GOG\Diablo\dx\dxcfg.exe and select 1280x1024 Display Mode

3. Set Presentation = Windowed (Fullscreen does not work)

4. Select Save

5. Set the Windows 10 Taskbar settings to "Automatically hide taskbar in desktop mode" = "on"

6. Double click on ...\GOG\Diablo\dx\Diablo.exe to launch the game.
Do not double-click on DiabloLauncher.exe to start the game

Oddly, if you run:
...\GOG\Diablo\dx\dxcfg.exe
and change to 1920x1080
and leave Presentation = Windowed
This gives a 4:3 aspect ratio in full-screen-mode - which to me is the ideal display of Diablo.

If you play around with ...\GOG\Diablo\dx\dxcfg.exe you will
find it provides Diablo in various 4:3 aspect displays in various ways.

1) By running diablo.exe in the /dx folder, you're just running the "high-resolution" support version, your guide didn't "fix" anything.
2) 1280x1024 isn't a 4:3 resolution, it is a 5:4 resolution.

OK... I appreciate the input... I was just trying to help people avoid the weird stretched-out version. 1280x1024 looks normal to me.

So, what is the deal with the ...\Diablo\dl folder? It has a special high resolution version of Diablo? What is that?

Do you have any other tips on how to avoid the stretched-out version?

There are two versions provided by the GOG installation. The classic version, which allows you to use multiplayer via Battle.net, and the DX version which supports high screen resolutions (though scaled so that sprites maintain their original size rather than showing you more on screen), but due to the changes made the DX version doesn't work with Battle.net.

To avoid stretching out the image, I'd recommend you set it up to use a 4:3 screen resolution (e.g. 800x600, 1024x768, 1280x960, 1600x1200) and then have your graphics card maintain the aspect ratio during scaling. Some monitors also allow you to maintain the aspect ratio if you use one that is different to the monitor itself.

Both AMD and nVidia have scaling options in driver settings.
Haven't had AMD card for a while (HD 6950) so not sure if it has changed.

For nVidia you can go to "Adjust desktop size and position" in control panel.
Set Aspect ratio scaling mode and perform scaling on GPU.
Also enable the override option to make it work with Diablo.

The above settings work fine with the classic version.

Any respectable monitor should also have scaling option built in.