The consumer staples sector is generally considered a reliable performer as it includes frequently purchased products like soap, toilet paper, toothpaste, and deodorant. Conservative investors tend to like the group, broadly speaking. However, dividend investors must be careful not to sacrifice their long-term income streams by focusing too much on current dividend yields. Here's a quick look at three of the leading consumer staples stocks.
A starting point
Dividend consistency is a hallmark of a great dividend stock. And the pinnacle of success on this front is probably making it onto the Dividend Kings list, which signifies that a company has increased its dividend annually for 50+ years. That's a streak that doesn't happen by accident. Consumer staples icons Procter & Gamble (PG 0.68%), Colgate-Palmolive (CL 0.33%), and Kimberly-Clark (KMB 1.28%) all make this highly elite list.
Interestingly, these three companies have material overlap in the products they produce. Kimberly Clark is focused on paper products like diapers, toilet paper, sanitary products, and towels. Colgate-Palmolive makes soap, toothpaste, and cleaning products and has a pet food operation. Procter & Gamble is a mix of both, with soap, cleaning products, toothpaste, and an array of paper products. Although they aren't interchangeable stocks, per se, they operate very similar businesses.
Conservative dividend investors looking at one of these companies have probably, at some point or another, examined the other two as well. At present, and fairly consistently over time, Kimberly-Clark has the highest dividend yield, at around 3.6%. Procter & Gamble and Colgate-Palmolive sit at roughly 2.5% and 2.6%, respectively.
KMB Dividend Yield data by YCharts.
That's a pretty big difference, which might lead investors focused on maximizing the current income they generate from their portfolios to pick Kimberly-Clark. But there's another angle to consider.
What about growth?
One of the reasons for Kimberly-Clark's higher yield is that its dividend growth isn't exactly huge. Over the past decade, the average annualized dividend increase was around 4.5%. While that's better than the historical rate of inflation growth, the two most recent increases were a scant 1.7%. In all fairness, inflation has been running hot and putting pressure on profit margins across the consumer staples space, so a slowdown in dividend growth isn't shocking.
Comparably, Colgate-Palmolive's annualized dividend growth over the past 10 years was just shy of 4.5%, and its most recent increase, announced in early May, was roughly 2.1%. That's a bit better, but investors would have to give up some yield to get only slightly better dividend growth. That's probably not worth it.
Procter & Gamble's annualized dividend growth over the past decade was roughly 5.5%, a step above both of its closest peers. Moreover, its most recent dividend increase was 5%, more than twice what either of its peers achieved and fairly close to its long-term average. While it has the lowest current yield, investors looking for a combination of yield and dividend growth will likely find it the most compelling option.
PG Dividend Per Share (Quarterly) data by YCharts.
What's most notable here, however, is the dividend growth Procter & Gamble is offering investors at a time when the consumer staples industry is facing headwinds. Simply put, while its peers are notably pulling back, Procter & Gamble is continuing to reward shareholders with consistent dividend growth. And while the dividend increase at Procter & Gamble was below recent inflation growth rates, the increase has done far more to maintain investors' buying power than what Kimberly-Clark or Colgate-Palmolive have with their recent increases.
Thinking long term
As a dividend investor, it's very easy to succumb to the desire to pick the highest-yielding option. That, however, is only looking at half the picture. Dividend growth can be just as important to your long-term income stream. Sometimes, the lowest yield is actually the best option, which is exactly what it looks like when you dig a little further into this trio of industry-leading consumer staples Dividend Kings.
