Consumer staple stocks are up 20% year to date. Critics say the sector is overbought. Yet consumer stocks still offer steady dividend yields of 2.5% -- even at today's stock prices. Compared to current yields on long term bonds, a 2.5% yield plus likely capital appreciation is not too shabby.
Church & Dwight (CHD +0.00%) , Colgate-Palmolive (CL 0.32%) and Procter & Gamble (PG 0.67%) are high-profit margin businesses with repeat-customer revenue streams. Their dividends grow almost every year. The consumer staples sector is much loved for its reliability of dividends. An ETF in this category is the Vanguard Consumer Staples ETF (VDC +0.55%), up 23.66% year to date and a dividend yield of 2.5%.
Vanguard Consumer Staples ETF is non-leveraged, so investors don't have the added risk of debt in the fund. The fund's top three holdings are Procter & Gamble, 12.28%, Coca-Cola, 8.87%, and Phillip Morris International, 8.14%.
Stable-to-falling commodity prices will help these consumer staples stocks going forward. This means the companies can expect input costs for raw materials to remain stable. If commodity prices actually fall, the companies could stand to improve their profit margins. And I love these profit margins -- all well above 10%.
| Name | Yield | Payout Ratio | Net Margin | Forward P/E | YTD Return | Dividend Growth Since 2009 |
| Church & Dwight | 1.74% | 39.16% | 11.90% | 22.97 | 20.25% | 134.78% |
| Colgate- Palmolive | 2.16% | 67.09% | 14.10% | 22.26 | 21.24% | 54.65% |
| Procter & Gamble | 2.98% | 56.59% | 13.55% | 18.83 | 17.68% | 36.07% |
| Coca-Cola | 2.89% | 83.94% | 18.63% | 18.56 | 7.53% | 36.58% |
| Phillip Morris International | 4.26% | 64.35% | 11.34% | 16.30 | 5.49% | 55.80% |
| Vanguard Consumer Staples ETF (VDC) | 2.55% | N/A | N/A | N/A | 23.66% | 51.12% |
Source: Charles Schwab research and company web sites.
Looking at performance, it's hard to beat the Vanguard Consumer Staples ETF, with its dividend up 51.12% since 2009 and the added benefit of diversity of stocks in the fund versus holding an individual stock. The fund employs an indexing investment approach designed to track the performance of the MSCI US Investable Market Index (IMI)/Consumer Staples 25/50, an index made up of stocks of large, mid-size, and small U.S. companies. This is a good lesson for investors, too. We all try to beat the benchmark, but why not just own the benchmark? The S&P 500 U.S. Consumer Staples Index was up 20.74% YTD through Oct. 25.
Investors want to own stocks with rising dividends. Clearly the big winner in this category is Church & Dwight, with its dividend growth up 134.78% since 2009 and stock up 20.25% year to date. The company sells household products such as Arm & Hammer, Orajel, and Trojan condoms. Another positive for the company is its low dividend payout ratio at 39.16%, which means there is plenty of room to raise the dividend and not have to worry about paying out more than its earnings. The downside to Church & Dwight is its current yield is lame at 1.74% compared to its peers.
Consumer product wars
Procter & Gamble towers over its competitors with its 300 products like Tide and its massive market capitalization at $219 billion. This is one of the mostly widely held stocks in the world. But it almost seems too big. It's hard to grow revenues at this level. A smaller more nimble company like Church & Dwight can bolt-on acquisitions that make a difference to its bottom line.
With a $58.8 billion market cap, Colgate-Palmolive is much smaller than Procter & Gamble. Colgate-Palmolive has many things going for it, including 7.5% sales growth in the third quarter in Asia, which represents 14% of total sales. Company sales in Europe and the South Pacific were up 1.5% in the third quarter, while Latin American, which represents nearly a third of company sales, declined 2%. US sales were up 1%. Colgate's Hill's Pet Nutrition division, which represents 12% of company sales, achieved 3% sales growth during third quarter 2013.
The downside in consumer staples is these stocks usually achieve modest annual revenue gains when the economy picks up versus higher revenue gains in housing and automotive stocks.
Inflation protection
Consumer companies raise prices on a regular basis to stay ahead of inflation. Price increases are usually in the low single digits, but if commodity prices suddenly were to run up 25%, these companies could raise prices and consumers would still buy their products, because they feel they can't live without them. Hair soap, detergent and pet food are must-haves in my household.
Conclusion
Consumer staple stocks should be a part of every stock portfolio. I like consumer product companies like Church & Dwight and Colgate-Palmolive for their steady dividend increases. The Vanguard Consumer Staples ETF is impressive for its diversification, no leverage and YTD performance. Any of these companies are worth a look to income investors looking to beef up their overall yield of their portfolios. As always, Foolish investors should do their own research before making any investment decisions.
