4 Stocks With Exceptional Track Records of Making Investors Richer
Down years are few and far between with these moneymaking stocks.
You rely on consumer staples every day -- daily essentials such as food and beverages, cleaning and personal hygiene products, household and home care products such as paper goods, and alcohol, tobacco, and cosmetics.
These are the goods you buy regardless of the economy, and the amount you buy is relatively fixed in good times and bad. In this way, the consumer staples sector behaves much differently than consumer discretionary businesses such as restaurants, hotels, and apparel, or consumer durables, which are long-lasting products such as furniture and electronics.
Consumer staples companies may not have the highest earnings growth or year-over-year revenue growth because these stocks tend to be large, mature companies. Historically, the sector has experienced relatively little disruption. But these stocks make up for that modest growth with low price volatility, reliable profits and dividends, and defensive positioning.
Consumer staples stocks function in a noncyclical manner, meaning they offer investors safety during recessionary climates. Since these companies sell products such as food and cleaning products that consumers rely on regardless of the state of the economy, they tend to generate solid profits even in weak economies. For instance, a number of consumer staples companies thrived during the early stages of the COVID-19 pandemic as consumers stocked up on essentials and avoided spending on discretionary purchases such as travel and restaurant meals.
Consumer staples are noncyclical, meaning they offer investors safety during recessionary climates.
Consumer staples stocks are also generally defensive, dividend-paying stocks, meaning they tend to outperform during economic downturns. Some are Dividend Aristocrats -- companies that have increased their dividend payouts every year for at least 25 consecutive years. For this reason, consumer staples stocks are often popular with retirees and other investors seeking income and security. Many offer better dividend yields than the companies of the S&P 500 (SNPINDEX:^GSPC), which currently pay an average dividend yield of 1.3%.
Because consumer staples companies operate in stable sectors and sell products that are always in demand, the biggest ones have been around for a century or more. Their longevity is a sign of their brand value, a history of acquiring smaller brands, and their ability to endure a wide range of challenges and economic cycles.
Just as you’re familiar with many consumer staples products, you’ll likely be familiar with many of the top stocks in the sector such as Costco Wholesale (NASDAQ:COST), Procter & Gamble (NYSE:PG), PepsiCo (NASDAQ:PEP), and Estee Lauder (NYSE:EL).
Costco doesn’t make consumer staples products, but it sells them -- in bulk. Most of its inventory consists of groceries and household items such as paper products and cleaning supplies. Costco has a number of advantages over its retail peers, largely because its membership model creates a reliable customer base with a retention rate of around 90%. Costco also earns most of its profits from membership fees, so it can offer rock-bottom prices on merchandise, giving it a competitive advantage. Under its Kirkland brand, it sells a wide range of products in categories such as diapers, chocolate, and toilet paper, further leveraging its unique retail position.
The retail stock has prospered during the coronavirus pandemic, with comparable sales growth (an industry metric that factors out new-store openings) jumping by double digits and e-commerce sales soaring. The company even rewarded investors with a $10-per-share special dividend in December 2020 to directly share a portion of the pandemic windfall with investors.
Procter & Gamble is best known for its marquee brands such as Tide, Gillette, and Crest. The household and personal care company is almost 200 years old and has 22 brands that generate $1 billion or more in annual revenue. Almost all of those brands hold the No. 1 or No. 2 market share position in their categories, which include paper products, laundry detergent, diapers, and beauty products. P&G is also a Dividend Aristocrat.
The company is currently developing innovative products, including the nontoxic insect repellent Zevo, and, in 2019, it released a line of plant-based cleaning products called Home Made Simple. After streamlining its business by selling off noncore brands, restructuring, and cutting costs, P&G's position is as strong as it’s ever been.
Like other consumer staples companies, P&G has gotten a healthy boost from the pandemic. Organic sales, which exclude the balance sheet impacts of acquisitions, divestitures, and currency exchanges, increased 6% during its fiscal year ending June 30, 2021, and core earnings per share rose 11%. The company's growth in fabric and home care, as well as in health care, was the most robust.
PepsiCo is much more than its namesake beverage brand. The company also owns Frito-Lay and Quaker, as well as other popular drink brands such as Tropicana and Gatorade. Its Frito-Lay snack business generates almost as much revenue in North America as its beverages, and that business has been a source of growth while soda sales slow in the U.S. and around the world. With its global brands and distribution, Pepsi enjoys many of the same advantages as industry giants P&G and beverage company competitor Coca-Cola (NYSE:KO).
Because of its exposure to the restaurant industry, Pepsi was more affected by the early stages of the pandemic, but the company began making a solid recovery in 2021.
The consumer staples company has also grown through acquisitions. In 2018, it acquired SodaStream, which gave PepsiCo a leading position in countertop soda-making, plus it bought energy drink maker Rockstar Energy in 2020.
PepsiCo is also a Dividend Aristocrat, having raised its quarterly payout for 48 years in a row, which shows that it’s an attractive stock for income investors.
The cosmetics subsector tends to be more volatile than other parts of the consumer staples industry. That’s because trends in the beauty business, which are subject to broader fashion tastes, tend to change more quickly and more easily provide traction for smaller brands.
Additionally, cosmetics companies were hit harder by the COVID-19 pandemic than most consumer staples businesses because social distancing led to a decline in the demand for makeup and fragrances.
Nonetheless, Estee Lauder has been a top performer, more than doubling the S&P 500’s 108% return over the past five years.
Estee Lauder is the second-biggest cosmetics company in the world behind L’Oreal (OTC:LRLCY), and it has an impressive array of prestige beauty brands, including Clinique, Aveda, La Mer, and MAC. The company’s recent growth has been driven in large part by its success in the Chinese market, where its skin care products have performed particularly well.
For the fiscal year ending in June, currency-neutral sales rose 22% in Asia, primarily from China, compared to just 11% growth overall. Momentum from China’s expanding middle class should help support the company’s growth, making the stock a good choice for investors looking for a mix of fast growth and the stability of a traditional consumer staples stock.
For investors who prefer exposure to the whole consumer staples sector rather than picking individual stocks, buying shares in an exchange-traded fund (ETF) is the most sensible option. The chart below summarizes three different consumer staples ETFs:
|Fund Name||Expense Ratio|
|Consumer Staples Select SPDR Fund (NYSEMKT:XLP)||0.13%|
|Vanguard Consumer Staples ETF (NYSEMKT:VDC)||0.1%|
|iShares U.S. Consumer Goods ETF (NYSEMKT:IYK)||0.43%|
The first two of these three ETFs have Costco, Procter & Gamble, PepsiCo, and Estee Lauder among their top 10 holdings. The iShares U.S. Consumer Goods ETF includes both consumer staples and consumer discretionary stocks, including Procter & Gamble, PepsiCo, and Estee Lauder, in its top 10, but it doesn’t own the stocks of retailers.
In addition, all three ETFs own popular consumer staples stocks such as Coca-Cola and the following:
The best consumer staples companies tend to have consistently strong organic sales, leading market shares, and attractive dividend yields. Although the industry sees relatively little innovation and growth, consumer staples products tend to be timeless, and these companies are likely to endure.
Consumer staples companies have an excellent ability to withstand recessions, increase their dividends, and post consistent, incremental growth. All of these characteristics make them good choices for investors looking for reliable, income-producing stocks.
Down years are few and far between with these moneymaking stocks.
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