Former Fidelity Magellan Fund manager Peter Lynch was famous for telling investors to find ideas by, essentially, looking around them as they navigated their lives. Today, as the market sells off, central banks hike interest rates, and investors fear a recession, you might want to follow this advice and look at what you and others are buying at the grocery store. Great dividend stocks are, basically, hiding in plain sight if you know where to look.
Down but not out
The Vanguard Consumer Staples ETF was recently off by around 10% from its highs earlier this year, which is way better than the performance of the S&P 500 Index. But that's still an opportunity because the performance of the Vanguard Consumer Staples ETF is essentially an average figure, meaning that some names are doing worse and others better. In fact, the only reason to even highlight the group-level performance is that the drop suggests there are more bad stock performances here than good.
But have you stopped going to the grocery store? Or, if you are more modern about things, have you stopped buying your groceries and other personal necessities online? The answer is no, because you can't. You need to eat. You need to drink. And you need to bathe and brush your teeth. These are the types of products that consumer staples companies sell. The stocks generally aren't very exciting, but they are reliable.
That's a good thing for dividends, with iconic names like Hormel (HRL 1.02%), Procter & Gamble (PG 1.19%), and PepsiCo (PEP 0.11%) all finding themselves on the Dividend King list. This means they've hiked their dividends annually for 50 or more years in a row.
It isn't hard to find the dominant names in this sector. Just look around you as you shop for your basic necessities. What are you buying? What are other people buying?
Some names to look at now
If you are looking to maximize the income you generate, you might want to consider Clorox (CLX 0.28%) or Unilever (UL 0.35%). Both are fairly well-run companies with long histories behind them. Specifically, they each own iconic brands with leadership positions in the niches where they compete. Clorox's stock was recently down about 20% from its early-year highs, while Unilever was off by 15%. Unilever's yield is a historically high 4.1%, while Clorox's yield is a historically high 3.2%. For reference, even after falling into a bear market, an S&P 500 ETF will only get you a yield of about 1.5%.
Clorox is rebuilding margins after inflation took a material toll on its profits. That said, the issue was complicated by a temporary demand spike for cleaning products during the early days of the pandemic. The company was forced to use contract manufacturers to keep store shelves filled, but at a higher production cost.
As demand returns to more normal levels and those contracts roll off, margins should improve. Then it will just be an issue of pushing through price hikes to deal with more normal inflation issues, which is a process that's already underway. There's no quick fix here, but given enough time it is highly likely that Clorox will get its business back on track.
Unilever is a bit more complex, since it involves activist investor Nelson Peltz and a business structure overhaul. But, after a period of great change (including shifting from a dual company structure to a single one, a new CEO, and the effects of the pandemic), it seems like management is taking a back-to-basics approach. That includes increasing the accountability of managers and focusing more on pay structure, with the help of new board member Peltz, who is now a member of the compensation committee.
Again, there are no quick fixes, but with a strong underlying business, Unilever should have ample time to get its business back on track.
Plenty more where those came from
Clorox and Unilever are not the only consumer staples stocks to look at. They are just two that seem to offer generous yields and material opportunity for long-term business improvements. Even if you don't end up buying them, you should take a close look just the same. That way, when you look for more hidden-in-plain-sight dividend stocks like them, such as Hormel, you'll have a reference point to which you can compare.