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Investing in Consumer Staples Stocks

Updated: May 11, 2021, 6:34 p.m.

You probably rely on consumer staples companies every day. Consumer staples are daily essentials such as 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 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 such as restaurants, hotels, and apparel, or consumer durables, which are long-lasting products like furniture and electronics.

Consumer staples companies may not have the highest earnings growth or year-over-year revenue growth because, as market leaders, they tend to already be large, mature companies. But these stocks make up for that modest growth with low price volatility, reliable profits and dividends, and defensive positioning.

Advantages of consumer staples stocks

Consumer staples stocks function in a noncyclical manner, meaning that 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 have thrived during the COVID-19 pandemic as consumers stocked up on essentials and avoided spending on non-essentials like travel and restaurant meals.

Did you know...

Consumer staples are noncyclical, meaning they offer investors safety during recessionary climates.

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Consumer staples stocks are also generally defensive, dividend-paying stocks, meaning they tend to outperform in economic downturns. Some of them are Dividend Aristocrats -- companies that have increased their dividend payouts every year for at least 25 consecutive years. For this reason, consumer staples investments are often popular with retirees and other investors seeking income and security. Many of them offer better dividend yields than the companies of the S&P 500 (SNPINDEX:^GSPC), which, on average at the time of this writing, pay a dividend yield of 1.4%.

Because consumer staples companies operate in stable sectors and sell products that are always in demand, the biggest ones have been around for ages, sometimes a century or more. That’s a sign of their brand value, as well as their ability to endure a wide range of challenges and economic cycles.

Hand on handle of grocery cart going down aisle

Image source: Getty Images

Top consumer staples stocks

Just as you’re already familiar with many consumer staples products, you likely know many of the top stocks in the sector such as Costco Wholesale (NASDAQ:COST), Procter & Gamble (NYSE:PG), and PepsiCo (NYSE:PEP).

1. Costco Wholesale

Costco doesn’t make consumer staples products, but it sells them. 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, which is a competitive advantage. 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 with investors a portion of the windfall.

2. Procter & Gamble

Procter & Gamble is best known for its marquee brands such as Tide, Gillette, and Crest. The household and personal care company is nearly 200 years old and has 22 brands that generate $1 billion or more in annual revenue. Nearly all of those brands hold the No. 1 or No. 2 market share in their categories, which include paper products, laundry detergent, diapers, and beauty products. P&G is also a Dividend Aristocrat.

This consumer staples company is currently developing innovative products, including the nontoxic insect repellent Zevo, and in 2019 released a line of plant-based cleaning products called Home Made Simple. After streamlining its business by selling off non-core brands, restructuring, and cutting costs, the company'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 4% in the quarter ending in March 2021. The company's growth in beauty, fabric, and home care was the most robust.

3. PepsiCo

PepsiCo is much more than just 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 snacks business generates nearly as much revenue as all of its beverages do internationally, and that business has been a source of growth while soda sales slow in the U.S. and around the world. With global brands and distribution, Pepsi enjoys many of the same advantages as industry giants P&G and fellow beverage company Coca-Cola (NYSE: KO).

The consumer staples company has also grown through acquisitions. In 2018, it acquired SodaStream, which gave PepsiCo a leading position in countertop soda-making. PepsiCo bought energy-drink market leader Rockstar Energy in 2020, showing that it continues to seek out acquisition opportunities.

PepsiCo is also a Dividend Aristocrat, having raised its quarterly payout for 48 years in a row. The company is facing some headwinds as it emerges from the pandemic, but its biggest segments are growing and it should get a boost as the dine-in restaurant business resumes in the U.S. and elsewhere.

Consumer staples ETFs

For investors who prefer exposure to the whole consumer staples sector rather than pick individual stocks, buying shares in an exchange-traded fund (ETF) is the most sensible option. The chart below summarizes three different consumer staples ETFs:

Data source: Yahoo! Finance
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) 0.42%

The first two of these ETFs have Costco, Procter & Gamble, and PepsiCo among their top five holdings. The iShares U.S. Consumer Goods ETF includes both consumer staples and consumer discretionary stocks but doesn’t own the stocks of retailers.

In addition, all three of these ETFs own popular consumer staples stocks such as Coca-Cola and the following:

Are consumer staples stocks right for you?

The best consumer staples companies tend to have consistently strong organic sales, leading market shares in several consumer staples sectors, and attractive dividend yields. Although the industry sees relatively little innovation or growth, consumer staples products tend to be timeless, and these companies are likely to endure for generations to come.

Consumer staples companies have an excellent ability to withstand recessions, increase their dividends, and post consistent if incremental growth. All of these characteristics make them good choices for investors looking for reliable, income-producing stocks.

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