You rely on consumer staples every day. They include daily essentials such as food and beverages, personal care products, household and home care products such as paper goods, and alcohol, tobacco, and cosmetics.
You buy consumer staples regardless of the state 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 modest growth with low price volatility, reliable profits, dividends, and defensive positioning.
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Advantages of consumer staples stocks
Consumer staples stocks function in a non-cyclical manner, meaning they offer investors safety during recessionary climates. Since these companies sell goods 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.
More recently, that spending has shifted back to discretionary categories, weighing on some consumer staples stocks such as Clorox (NYSE:CLX), which had earlier benefited from the demand for cleaning products.
Did you know...
Consumer staples are noncyclical, meaning they offer investors safety during recessionary climates.
Some consumer staples stocks 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 long-term income and security. Many offer better dividend yields than an (SNPINDEX: ^GSPC) exchange-traded fund (ETF), which currently pays a dividend yield of roughly 1.5%.
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 reflection of their brand value, a history of acquiring smaller brands, and their ability to endure a wide range of challenges and economic cycles.
One important factor to monitor when looking at a consumer staples company is its ability to pass on cost increases. Although this issue often takes center stage during inflationary periods (like today), it is always an important component of growth. Simple price increases, changing packaging sizes, and production innovation are all vital tactics that get used. In inflationary periods, costs for ingredients, labor, and distribution often rise faster than a company’s ability to pass on price changes. There can be a period of margin weakness that will likely be temporary for the best-managed consumer staples companies. Price increases also need to be balanced against the risk of consumers trading down to cheaper alternatives.
Top consumer staples stocks to buy
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 Procter & Gamble (NYSE:PG), PepsiCo (NYSE:PEP), and Estee Lauder (NYSE:EL). For those interested in a contrarian name, Unilever (NYSE:UL) is also worth examining.
1. Procter & Gamble
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. A large number of its brands hold the No. 1 or No. 2 market share position in their categories, including paper products, laundry detergent, diapers, and beauty products. P&G is also a Dividend Aristocrat.
P&G is currently developing innovative products, including the nontoxic insect repellent Zevo. In 2019, it 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, P&G's position is as strong as ever.
Like other consumer staples companies, P&G received a healthy boost from the pandemic. However, the company’s results have continued to be strong, with organic sales (which exclude the effects of acquisitions, divestitures, and currency exchanges) up 10% during the fiscal third quarter ending June 30, 2022. Core earnings per share also rose 6%. Notably, the organic sales gain was driven by a mixture of higher volume, price increases, and selling more higher-priced items. The company is hitting on all cylinders.
PepsiCo is much more than its namesake beverage brand. The company also owns Frito-Lay and Quaker, as well as popular drink brands such as Mountain Dew 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. However, the company was able to quickly recover, and it posted 9.5% organic revenue growth in 2021. Through the first six months of 2022, it kept the ball rolling by expanding organic revenue growth by 13.3%.
Pepsi has also grown through acquisitions. In 2018, it acquired SodaStream, which gave the company a leading position in countertop soda-making. It also bought energy drink maker Rockstar Energy in 2020.
PepsiCo recently became a Dividend King, having raised its quarterly payout for 50 years in a row, which shows that it’s an attractive stock for income investors.
3. Estee Lauder
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 attract 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 roughly 60% return over the past five years. However, that includes a more dramatic ascent and a much steeper decline during the 2022 bear market, highlighting the volatile nature of the sector.
Estee Lauder is the second-biggest pure-play 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.
That said, recent efforts in China to contain the spread of COVID-19 have led the company to reduce its fiscal 2022 guidance. The drop was notable, taking organic sales growth to between 5% and 7%, down from the previous guidance of 10% to 13%. Still, the stock is likely to be a good choice for investors looking for a mix of high growth and the stability of a traditional consumer staples stock despite the near-term uncertainty related to pandemic issues.
For investors who prefer to take a contrarian approach, Unilever is working on a business turnaround. The negatives here, which include the failure to consummate a high-profile acquisition, have left the shares with a historically high dividend yield of about 4.2%. What’s most interesting, however, is that activist investor Nelson Peltz – who was instrumental in turning Procter & Gamble’s business around – has been added to Unilever’s board of directors.
Although there is unlikely to be a short-term fix to Unilever’s problems, the company is already streamlining its business to increase the accountability of key leaders, something Peltz has suggested is necessary. And, with iconic global brands such as Dove, Ben & Jerry’s, Knorr, and Hellmann’s, the company has a strong brand portfolio to lean on as it works to improve its growth profile. Long-term investors can happily collect the generous yield while waiting for Unilever’s business performance to improve.
Consumer staples ETFs
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)||0.1%|
|Vanguard Consumer Staples ETF (NYSEMKT:VDC)||0.1%|
|iShares U.S. Consumer Goods ETF (NYSEMKT:IYK)||0.41%|
All three ETFs have Procter & Gamble as their No. 1 holding. PepsiCo and Coca-Cola show up in the next two slots of each top-10 list, with Estee Lauder turning up lower down on two of the three lists. The iShares U.S. Consumer Staples ETF doesn’t include retailers, but the other two ETFs have giants such as Walmart (NYSE:WMT) and Costco (NASDAQ:COST) making the cut.
In addition, all three ETFs own popular consumer staples stocks such as:
- Philip Morris (NYSE:PM)
- Mondelez (NASDAQ:MDLZ)
- Altria (NYSE:MO)
- Colgate-Palmolive (NYSE:CL)
Are consumer staples stocks right for you?
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 continue to endure.
Consumer staples companies have an excellent ability to withstand recessions, increase their dividends, and post consistent, incremental growth. All of those characteristics make them good choices for investors looking for reliable, income-producing stocks.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart Inc. The Motley Fool recommends Philip Morris International and Unilever and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
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Stability and longevity. The largest consumer staples companies have been in business for decades, some for even more than a century. Since they sell products that are always in demand, consumer staples stocks sustain long-term brand value—and that translates into long-term stock value for investors.Do consumer staples do well in inflation? ›
Consumer staples stocks mostly do well because price increases are passed on to consumers. Mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) are risky choices but tend to perform well under inflationary pressure.
The term consumer staples refers to a set of essential products used by consumers. This category includes things like foods and beverages, household goods, and hygiene products as well as alcohol and tobacco.What are the hottest stocks right now? ›
|SLB Schlumberger NV||50.41||+4.72|
|FCX Freeport-McMoRan Inc||32.03||+2.91|
|NUE Nucor Corp||135.56||+10.64|
|HAL Halliburton Co||33.88||+2.22|
That means, in this case, the most you should have in consumer staples stocks is 55% of your money, even if you want all of the stocks in your portfolio to be concentrated in this sector. Your Appetite for Risk.What is the best ETF for consumer staples? ›
The consumer staples exchange-traded funds (ETFs) with the best one-year trailing total returns are FXG, FTXG, and PBJ. The top holding of these ETFs is Mckesson Corporation in the first fund, Kellogg Company in the second fund, and General Mills Inc. in the third fund.
Consumer Staples Are Overvalued
On a forward basis, the consumer staples sector is trading at ~20x P/E, which is high historically. This level of valuation was only exceeded in the late 90s, before the dot-com crash took it much lower.
- Precious metals.
- Consumer staples.
- Property Real Estate Investment Trusts (REITs)
High inflation has historically correlated with lower returns on equities. Value stocks tends to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation.
- TIPS. TIPS stands for Treasury Inflation-Protected Securities. ...
- Cash. Cash is often overlooked as an inflation hedge, says Arnott. ...
- Short-term bonds. ...
- Stocks. ...
- Real estate. ...
- Gold. ...
- Commodities. ...
Take consumer staples. Their businesses tend to hold up better during recessions because people will continue to buy food and other necessities even as they cut back on, well, everything else.What are the 5 consumer products? ›
- Convenience products.
- Shopping products.
- Specialty products.
- Unsought products.
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|Marathon Oil Corp. (MRO)||$25.76||$17.455 billion|
|Qualcomm Inc. (QCOM)||$124.77||$143.104 billion|
|Berkshire Hathaway Inc. (BRK-A)||$419,869||$608.826 billion|
- Hemani IPO.
- Corrtech IPO.
- Paymate IPO.
- Rustomjee IPO.
- Senco Gold IPO.
- Rainbow IPO.
- Sterlite IPO.
- Fincare IPO.
- Short-term certificates of deposit.
- Money market funds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
- Money market accounts.
- Fixed annuities.
- Reliance Industries.
- Tata Consultancy Services.
- HDFC Bank.
- Stocks & ETFs. ...
- Use a Robo-Advisor. ...
- Chip Away at High-Interest Debt. ...
- Use Real Estate Crowdfunding Sites. ...
- Invest in U.S. Treasury Securities. ...
- Use a High-Yield Savings Account. ...
- Consider Alternative Assets. ...
- Invest In New Skills.
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Generally speaking, many sources say 20 to 30 stocks is an ideal range for most portfolios. It's important to strike a balance between investing in a diverse array of assets and ensuring that you have the time and resources to manage these investments.
Some experts say that somewhere between 20 and 30 stocks is the sweet spot for manageability and diversification for most portfolios of individual stocks.
The average diversified portfolio holds between 20 and 30 stocks. Diversifying your portfolio in the stock market is an investing best practice because it decreases non-systemic, or company-specific, risk by ensuring that no single company has too much influence over the value of your holdings.What are the top 5 ETFs to buy? ›
- These top ETFs can help smooth things out in a bumpy market. ...
- Invesco S&P 500 GARP ETF (ticker: SPGP) ...
- Invesco S&P 500 Low Volatility ETF (SPLV) ...
- iShares Select Dividend ETF (DVY) ...
- Consumer Staples Select Sector SPDR ETF (XLP) ...
- SPDR Gold Shares (GLD)
|QLD||ProShares Ultra QQQ||121.23%|
|XLK||Technology Select Sector SPDR Fund||111.49%|
|VGT||Vanguard Information Technology ETF||109.32%|
|PALL||abrdn Physical Palladium Shares ETF||108.52%|
Buffett revealed that his will stipulates that 90% of the money should be invested in a low-cost S&P 500 index fund with 10% in short-term government bonds. He suggested Vanguard, which operates the Vanguard 500 Index Fund ETF (VOO 2.40%).
- Communication services.
- Consumer discretionary.
- Consumer staples.
- Health care.
- Information technology.
By contrast, companies in the consumer staples sector sell essential items such as food and beverages, which are less sensitive to business cycles. Prominent examples of consumer staples companies are The Home Depot, Inc. and McDonald's Corp.
The following section summarizes insights on Walmart Inc.'s Sector: Walmart's sector is Consumer Staples.What stocks do well during rate hikes? ›
Financials benefit from higher rates through increased profit margins. Brokerages often see an uptick in trading activity when the economy improves and higher interest income when rates move higher. Industrials, consumer names, and retailers can also outperform when the economy improves and interest rates move higher.
Take consumer staples. Their businesses tend to hold up better during recessions because people will continue to buy food and other necessities even as they cut back on, well, everything else.
Consumer staples, including toothpaste, soap, and shampoo, enjoy a steady demand for their products during recessions and other emergencies, such as pandemics. Discount stores often do incredibly well during recessions because their staple products are cheaper.
Cyclical stocks typically outperform during times of economic expansion, but they usually underperform when the economy displays weakness, or when investors are anticipating economic weakness. Non-cyclical businesses are less exposed to the economic cycle and typically outperform during times of economic contraction.Are consumer staples recession proof? ›
Stock sectors like consumer staples are considered recession-resistant because goods like food will always be in demand.
The U.S. has already experienced two consecutive quarters of negative GDP growth in 2022, which some people consider to be a recession. But others are waiting for the National Bureau of Economic Research to make the final call—and it has yet to do so.Are we in a recession 2022? ›
Gabriel Ehrlich, director of the University of Michigan's Research Seminar in Quantitative Economics, said the data is clear that we're not in a recession based on the numbers through the third quarter of 2022.
Think about the kind of companies that perform well in recessions. Utility companies do well. Tobacco, alcohol, fast food, and soft drinks do well. Consumer staple companies like Kimberly-Clark, Colgate-Palmolive, Procter & Gamble, and Johnson & Johnson do well.Where should I put my money before the market crashes? ›
- Treasury Bonds. ...
- Corporate Bond Funds. ...
- Money Market Funds. ...
- Gold. ...
- Precious Metal Funds. ...
- REITS—Real Estate Investment Trusts. ...
- Dividend Stocks. ...
- Essential Sector Stocks and Funds.
There are no fully recession-proof stocks. Some sectors, such as consumer staples, health care and utilities, have historically done better than the broad market during recessions. Advisors also point to value stocks and commercial real estate as potentially advantageous investments during downturns.Where do I put my money for inflation? ›
Real estate traditionally does well during periods of higher inflation, as the value of a property can increase. This means your landlord can charge you more for rent, which in turn increases their income so it is on pace with the rising inflation.
|Consumer Discretionary Stocks with the Most Momentum|
|Price ($)||12-Month Trailing Total Return (%)|
|H&R Block Inc. (HRB)||42.32||71.9|
|Genuine Parts Co. (GPC)||149.13||24.4|
|AutoZone Inc. (AZO)||2,093.68||23.5|
- Precious metals.
- Consumer staples.
- Property Real Estate Investment Trusts (REITs)
Cyclical stocks represent companies that make or sell discretionary items and services that are in demand when the economy is doing well. They include restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers.What industries will grow in 2022? ›
- Global Airport Operation. 2022-2023 Revenue Growth: 47.2% ...
- Global Hotels & Resorts. ...
- Global Travel Agency Services. ...
- Global Tourism. ...
- Global Airlines. ...
- Global Casinos & Online Gambling. ...
- Global Commercial Aircraft Manufacturing. ...
- Global Semiconductor & Electronic Parts Manufacturing.