Although there’s no such thing as a risk-free investment, many investors are interested in investing in companies with stable growth and high dividend potential. Consumer staples stocks tend to be less sensitive to external factors that may disrupt companies when the economy is in a recession.
Consumer staples companies may not have the highest year-over-year revenue growth, but they are large, mature companies with reliable profits and high dividend yields to make up for the modest growth. Many people invest in consumer staples stocks to lower their portfolio risk during an economic downturn.
Read on to learn more about consumer staples and how to invest in consumer staples stocks.
In this Guide:
What Are Consumer Staples?
Consumer staples are goods you regularly buy regardless of the state of the economy. Think about the daily essentials you use every day: food, hygiene products, cosmetics, household products like toilet paper, alcohol, and tobacco — all of these are consumer staples. Consumer staples are essentially any product you buy at a relatively constant level.
How to Invest in Consumer Staples Stocks
Investing in consumer staples stocks is a great way to minimize losses during recessionary periods. Given the necessity of consumer staples, companies in this sector often sell products that are always in demand. Some of these companies have been around for decades; that’s why they can endure economic cycles and tough times, such as a pandemic.
For instance, several consumer staples companies have thrived during the COVID-19 pandemic as consumers stocked up on daily essentials and stayed away from non-essentials like travel and eating out.
You can invest in consumer staples stocks in three different ways:
1. Blue-chip Stocks
Blue-chip stocks are established companies that have operated in the industry for several years and have earned an excellent reputation. These companies may view their size as a weakness when there is a shift in consumer demand.
For example, Procter & Gamble is a consumer staples company that manufactures and sells personal care and household products like Crest toothpaste and Gillette shaving products. Even in tough economic times, P&G could still benefit because the average consumer isn’t willing to go without brushing their teeth.
Other consumer staples stocks are cyclical, meaning they react to economic cycles. For instance, Coca-Cola is blue-chip stock as well as a consumer staples company that sells non-alcoholic beverages. But, during the global pandemic, the company saw a massive decline as people avoided eating out at restaurants — which a considerable portion of their soft drink business relied upon.
While consumer staples companies are stable and offer investors safety during unprecedented times, there’s no guarantee that consumer staple stocks will remain competitive in the future market.
2. Fractional Shares
With several publicly traded consumer staples companies, you can invest in any of your favorite consumer staples stocks at any dollar amount. You don’t even have to purchase a full share of the stock; you can buy a fraction of it. This is where fractional shares come into play.
A fractional share is a portion of a stock that’s less than a whole share. Typically, fractional shares resulting from stock splits, which don’t always lead to an even number of shares. Let’s say a company you like is currently trading at $1,000, and you have only $50 to invest; you can buy 1/20 (5%) of a share of that company. If the stock price rises and you decide to sell, you’ll earn returns in the proportion of the share you bought.
Fractional shares can be beneficial if you have a low investment budget and can’t afford to buy whole shares. Buying a portion of shares in different companies will help diversify your portfolio. As such, you’ll be minimizing losses while maximizing returns. You’ll need to find a broker that allows fractional share investing. Some of the best brokers for fractional shares that we recommend are:
Consumer Staples ETFs
Consumer staples stocks tend to be relatively stable and less volatile than other sectors of the equity market. If you prefer exposure to the entire consumer staples sector rather than picking individual stocks, then consumer staples exchange-traded funds (ETFs) might be a perfect option. Investing in ETFs focused on this sector can lower your investment risk.
There are several consumer staples ETFs that trade in the U.S. According to the ETF database, these are five of the best-performing consumer staples ETFs:
- Consumer Staples Select Sector SPDR Fund (XLP)
- Vanguard Consumer Staples ETF (VDC)
- iShares Europe ETF (IEV)
- Fidelity MSCI Consumer Staples Index ETF (FSTA)
- iShares U.S. Consumer Goods ETF (IYK)
How to Find Consumer Staples Companies to Invest in
You’re probably using products from some consumer staples companies. Buying shares in your favorite big-name companies is a great way to invest.
- To get started, create a watchlist of stocks and ETFs in the consumer staples sector.
- Pick stocks and ETFs that interest you, and regularly monitor their performance.
- Stay current by following market news and updates from the companies you’ve chosen.
Being a good investor involves actively consuming market trends and refreshing your knowledge about what’s happening in the market. Most importantly, research and do your due diligence.
Top Consumer Staples Stocks
Now that you’re familiar with consumer staples products, you probably know some stocks in the consumer staples sector. Here are some of the best consumer staples stocks you may want to consider adding to your portfolio. Keep in mind that these are just examples and are not meant to be taken as financial advice. If you need help figuring out what to invest in, we recommend finding a certified financial advisor through Paladin Registry.
1. Procter & Gamble
Procter & Gamble is a personal and household care company that has been operating for nearly 200 years. It is the company behind well-known brands such as Tide and Charmin. Nearly all of the P&G brands hold the first or the second position in the market share in their product categories, including laundry detergent, paper products, beauty products and diapers.
Like other consumer staples companies, P&G has thrived during the pandemic. The company saw a 4% increase in organic sales for the third quarter ending March 2021, driven by beauty, fabric, and home care product categories.
P&G is also a dividend aristocrat, having raised its quarterly payout for 65 years in a row.
2. Costco Wholesale
Unlike P&G which manufactures and sells consumer staples, Costco only sells them. Costco is a retail company that discounts consumers for purchasing groceries and household items, such as cleaning supplies, toiletries and other consumer goods in bulk.
Costco has a tremendous cash flow compared to its retail peers, largely because it earns most of its profits from membership fees. With over 100 million Costco cardholders, each paying $60 for membership, Costco made roughly $3.6 billion just from renewals in 2020.
The wholesale company also did well amid the coronavirus pandemic sending its e-commerce sales soaring.
Pepsi is one of the most popular beverage brands in the world after Coca-Cola. The New York-based multinational food, snacks and beverage company is one of the best consumer staples stocks to buy. The company generated over $70 billion in net revenue in 2020, driven by some of its famous brands, including Frito-Lay, Quaker, Gatorade, Tropicana, Pepsi-Cola and SodaStream.
The consumer staples company has been making strategic acquisitions that have contributed to its immense growth. In 2018, PepsiCo acquired SodaStream and Rockstar Energy drink in 2020, showing it will continue to look for more acquisitions.
Pepsi is also a dividend aristocrat, having raised its quarterly payout for 48 consecutive years. Although the company is facing headwinds due to the global pandemic, it’s likely to rebound when people resume eating out in restaurants.
What Metrics to Look At
One of the biggest challenges investors face is not knowing what metrics to look at when determining what consumer staple stocks to invest in. Here are three metrics that can help you choose stocks in the consumer staples sector:
- Organic Sales — Consumer staples companies tend to have consistent organic sales no matter what’s happening in the economy. Companies in this sector sell products we use daily, which people will buy regardless of price. The best consumer staples companies have consistent organic sales generated from these essential products.
- Market Shares — Nearly all the consumer staples companies hold a high percentage of the market share. Checking the market share of multiple consumer staples companies will help you uncover attractive companies in this sector.
- Dividend Yield — Since consumer staples companies have a remarkable ability to withstand economic recessions, they often offer attractive dividends to their shareholders. Before buying shares in any company in the consumer staples sector, be sure to check if they pay dividends to shareholders.
Bottom Line: Should You Invest in Consumer Staples Stocks?
Are consumer staples stocks right for you? Many investors who own shares of consumer staples companies want to minimize risks and diversify their portfolios. Historically, companies in this sector sell essential goods that we buy daily and tend to have consistent organic sales regardless of the economy. These companies are likely to hold on for generations to come.
If you’re looking to diversify and add growth or high-dividend stocks to your portfolio, then consumer staples stocks are worth considering.