I like consumer goods stocks, particularly those with a focus on providing me access to companies that support the everyday purchases of everyday people. A lot of companies fall into this broad grouping, but three of my top picks right now are Realty Income (O +0.87%), which needs a bit of explaining, Hormel Foods (HRL 1.25%), and Hershey (HSY 3.95%).
Here's a quick look at this trio of dividend stocks offering yields of up to 5.6%.
What does Realty Income do?
When you buy things like groceries, clothing, or food, you probably go to a physical store a lot of the time. These types of retailers provide a direct way to get exposure to consumers. However, a big variable is introduced, as retailers across the spectrum go in and out of favor with consumers. It is hard to determine which retailer or restaurant will be the winner at any given time. Which is why real estate investment trust (REIT) Realty Income is so attractive to me.
NYSE: O
Key Data Points
Realty Income owns single-tenant net lease properties, which means the tenant is responsible for most property-level operating costs. Roughly 75% of the rents from its over 15,600 properties are tied to the retail sector. The rest comes from industrial assets and unique one-offs, like casinos.
If you own Realty Income, you don't have to worry about which retail concept wins because the REIT has exposure to so many different concepts (it has nearly 1,600 different tenants). If there's a problem with a tenant, which happens from time to time, Realty Income can sell the property or lease it to a new retailer.
All in, Realty Income offers relatively low-risk exposure to the consumer goods niche. The proof of this is that it has increased its dividend annually for 30 consecutive years. And if you buy today, you get a very attractive 5.6% dividend yield.
Image source: Getty Images.
Hormel and Hershey are struggling
Hormel and Hershey are far more direct plays on the consumer side, with both being food manufacturers. Hormel owns a wide selection of packaged food brands with an emphasis on protein. Hershey owns iconic confection brands and a small portfolio of salty snack brands. They both have solid dividend histories, with Hershey's dividend heading steadily higher over time, though not on an annual basis, and Hormel sitting among the highly elite group of companies known as Dividend Kings (50-plus consecutive annual dividend hikes).
Both Hormel and Hershey are interesting right now because they are each offering historically high dividend yields. Hormel's yield is around 3.8% today, and Hershey's is roughly 3.2%.
NYSE: HSY
Key Data Points
To be fair, each company is facing headwinds today, so it takes a contrarian bent to step aboard. Hormel is having trouble pushing through price increases as it faces rising costs and challenges due to avian flu and slow growth in China. Hershey is dealing with a massive increase in the price of cocoa, a key ingredient in chocolate. But both companies are financially strong and have the leeway to make choices that are in the best long-term interest of their investors.
There's a unique feature that Hormel and Hershey share that increases the likelihood of long-term success, helping to make them no-brainer buys despite the adversity they are facing. Both companies have material nonprofit shareholders that the companies' founders created. The Hormel Foundation and The Hershey Trust have a massive say in how each of these companies operates. Basically, these two philanthropic organizations use the dividends they collect to support their charitable giving.
NYSE: HRL
Key Data Points
The Hershey Trust has a vested interest in Hershey, the company, making decisions that will keep the dividend growing over time. The Hormel Foundation, likewise, has a vested interest in ensuring that Hormel, the company, makes good business decisions that sustain the dividend growth. The large ownership stakes of both of these charity organizations mean that the companies can do what's in the long-term interests of shareholders, rather than bowing to the whims of Wall Street, which sometimes means making short-term choices that hurt a company's long-term prospects.
You can find higher yields in the consumer staples sector, but Hershey and Hormel stand out for their ability to think long term. They also offer attractive yields and recovery potential as they work through their current business issues. And they really become attractive if you pair them with a boring high-yield stalwart like Realty Income.
Think about more than just yield
There are a lot of different consumer goods stocks you can buy. Finding ones with attractive yields and strong underlying stories is the key. Realty Income is a slow and steady tortoise that can be a foundational dividend investment. It gives you the leeway to invest in more aggressive options, such as Hormel and Hershey, two iconic consumer staples companies facing headwinds that are likely to be temporary.
