Consumer staples stocks are usually a pretty boring group. And yet the sector has long proved a steady source of growing businesses that pay reliable dividends.
Generally speaking, the consumer staples sector is out of favor right now. Add in some company-specific issues, and PepsiCo (PEP 0.48%), Clorox (CLX 0.31%), and Hershey (HSY +3.21%) are all offering historically high yields despite very impressive business histories.
I'm a happy owner of all three. Here's why you might want to own them, too.
Image source: Getty Images.
PepsiCo is making the right moves
PepsiCo is a major player in the beverage, snack, and packaged food categories. It is a Dividend King, with more than five decades of annual dividend increases under its belt. That's an impressive string of dividend growth and something that a company can't achieve by accident.
PepsiCo has a strong business plan that gets executed well in both good times and bad. Right now is a bad time, highlighted by the fact that the stock's roughly 4% dividend yield is near the highest levels in the company's history.
NASDAQ: PEP
Key Data Points
What's exciting here is that management is already making moves to get back on track with consumer trends. One big step was to buy on-target brands Poppi and Siete, as management used acquisitions to update its brand portfolio.
But it has also been creating new versions of its in-house brands that focus on a healthier lifestyle, such as salty snacks with higher protein levels.
None of this is going to change the company's performance overnight, but given enough time, history suggests that PepsiCo will eventually get back on track just like it has many times before. You can collect a hefty dividend yield while you wait for growth to resume.
Clorox is muddling through some headwinds
Clorox is an important producer of consumer staples spanning from cleaning products to kitty litter, and a lot in between. It is something of a sharpshooter, looking for segments where it can be an industry leader. The company's success in this regard is highlighted by its streak of 48 consecutive annual dividend increases. The last few years have been tough.
NYSE: CLX
Key Data Points
First, Clorox saw a spike in demand for cleaning products during the coronavirus pandemic. When that spike cooled, investors soured on the stock. At about that time, the company got hit with a hacking attack that forced it to use paper and pencil to track its business for a brief period of time. Now it is working through an update of its technology systems.
All in, it is hard to sort out the financial statements right now, and investors are taking a wait-and-see approach. But the history is very clear; Clorox is a historically well-run business. And if you buy it, you can collect a 4.6% yield (near the highest levels in the company's history) that is backed by a dividend that has grown steadily over time.
Hershey is all about the growth
Compared to Clorox and PepsiCo, Hershey is a dividend also run with just 15 consecutive annual dividend increases behind it. However, the annualized dividend growth over the past decade was a robust 10% or so, which is a very compelling figure when you combine it with the historically high 3.2% dividend yield on offer today.
Hershey's core business is selling chocolate, but it is also expanding into sugary treats and salty snacks.
NYSE: HSY
Key Data Points
Hershey is out of favor today because cocoa prices are elevated. That's not good, given how important that ingredient is for making chocolate. Hershey's profits plunged because it can't pass along all of the price increases it faces. The company estimates that full-year 2025 earnings will drop by as much as 37%.
That's bad, of course, but commodities are volatile and, eventually, cocoa prices will fall. Hershey's sales, meanwhile, continue to grow, showing that the company hasn't lost its mojo.
If you can stomach sitting through a difficult period with one ingredient, Hershey might be a good addition to your portfolio.
I love out-of-favor stocks that are reliable dividend growers
My stock selection approach is fairly simple. I like to buy well-run companies that I believe are attractively priced and then hold them for the long term. (That's what Warren Buffett does, too.) I identify well-run companies by looking at dividend histories. I highlight attractive prices by comparing dividend yields. And if I believe the yield is high for a temporary reason, I'll buy and hold through whatever turbulence has left a stock out of favor.
PepsiCo, Clorox, and Hershey all have impressive histories of growth behind them, with regard to their dividends and the businesses behind the dividends. In fact, they own iconic and industry-leading brands. I don't believe the growth story is over for any of them. And I'm happily holding them today, even if Wall Street seems to be sleeping on the long-term opportunity they present.
