
After a Great Run Last Year, Is WD-40 Overvalued?
Stock in the company that manufactures the ubiquitous blue and yellow can is certainly starting to look expensive.
Whether you think about it or not, you probably rely on consumer staples companies every day. Consumer staples are daily life essentials like food and beverages, cleaning and personal hygiene products, household products like paper goods, and alcohol, tobacco, and cosmetics.
They’re the kinds of goods you buy and stock your house with regardless of the greater state of the economy, and the amount you buy or spend on them is relatively fixed. In this way, the consumer staples sector behaves much differently from consumer discretionary businesses like restaurants, hotels, and apparel. Consumer discretionary goods are best defined as wants rather than needs. They are products or services that consumers will purchase if they have sufficient income. With those kinds of goods and services, consumers tend to increase their spending and consumption in good economic times and pull back during a recession.
Consumer staples companies may not have the highest earnings growth or year-over-year revenue growth, because as market leaders, they are already large, mature companies. But these stocks make up for that modest growth with safety, reliable profits, dividends, and defensive positioning.
Consumer staples stocks function noncyclically, meaning they offer investors safety during recessionary climates. Since these companies sell products like food and cleaning products that consumers rely on regardless of the state of the economy, they tend to generate solid profits even in a weak economy. For instance, a number of consumer staples stocks have thrived during the pandemic as consumers stock up on essentials and avoid spending on things like travel and restaurant meals.
Consumer staples are noncyclical, meaning they offer investors safety during recessionary climates.
They are also generally defensive, dividend-paying stocks, meaning they tend to outperform in down markets. Some of them are Dividend Aristocrats -- stocks that have increased their dividend payout every year for at least 25 years. For this reason, consumer staples stocks are often popular with retirees and other investors seeking income and security. Many of them offer better dividend yields than the S&P 500, which pays a 1.6% yield as of December 2020.
Because these companies operate in a stable sector and sell products that are always in demand, the biggest consumer staples companies have been around for ages, sometimes a century or more. That’s a sign of their brand power, as well as their ability to endure a wide range of challenges and economic cycles, and it adds to their attractiveness as defensive stocks with healthy dividends.
Image source: Getty Images
Just as you’re already familiar with many consumer staples products, you likely know many of the top stocks in the sector, such as Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), and Pepsico (NYSE:PEP), which we discuss below.
There are many types of agriculture businesses that provide an array of investing opportunities.
These companies have typically performed well for investors, but they come with risks, too.
Unlike consumer staples, these companies tend to follow broader economic trends during times of expansion and recession.
While they are not considered staples, retail companies are intertwined with the consumer staples sector.
For investors who prefer to get exposure to the whole sector rather than pick individual stocks, buying an exchange-traded fund in the sector is the most sensible option. The chart below presents three different ETFs in the industry, Consumer Staples Select SPDR Fund (NYSEMKT:XLP), Vanguard Consumer Staples ETF (NYSEMKT:VDC) and iShares U.S. Consumer Goods ETF (NYSEMKT:IYK).
Source: Yahoo Finance
The first two of these ETFs have Costco, Procter & Gamble, and PepsiCo as their top three holdings, while the last one includes both consumer staples and discretionary stocks.
In addition, they own popular consumer staples stocks like Walmart (NYSE:WMT) and Coca-Cola as well as stocks like the following:
Fund Name | Ticker | Expense Ratio |
---|---|---|
Consumer Staples Select SPDR Fund (NYSEMKT:XLP) | NYSEMKT:XLP | 0.13% |
Vanguard Consumer Staples ETF (NYSEMKT:VDC) | NYSEMKT:VDC | 0.1% |
iShares U.S. Consumer Goods ETF (NYSEMKT:IYK) | NYSEMKT:IYK | 0.42% |
I've given you some of my favorites, but you can find great consumer staples stocks, too. In order to evaluate consumer staples companies and choose the best stocks, it’s important to understand some key industry metrics. Those include the following:
Because consumer staples products tend to be timeless and the industry sees relatively little innovation, these companies are likely to endure for generations to come. Though they may not deliver the fastest earnings growth on the market, their ability to withstand recessions, increase their dividends, and put up consistent growth makes them excellent choices for investors looking for reliable, income-producing stocks that will help them sleep easy at night.
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