As the market gets crazy, boring tends to beat exciting as investors rush to safety. And you can’t get more boring than ranch dressing, toilet paper and toothpaste. It’s the reason why consumer staples stocks have been on fire over the last year. As political turmoil, slowing growth and other issues have made for a volatile market, many investors have found solace in consumer staples stocks. After all, people still need to brush their teeth and eat even if the economy is trending lower.
To that end, the Consumer Staples Select Sector SPDR (NYSEARCA:XLP) has had a banner year — returning more than 20% year-to-date. And some individual consumer staples stocks have done even better than the benchmark exchange-traded fund.
Perhaps the best part is, as the uncertainty continues to grow, consumer staples stocks have even more appeal for investors. For one thing, many consumer stocks fit the definition of “quality” and have strong stable earnings. Secondly, they tend to be dividend-paying stocks and those dividends can provide a nice cushion during periods of market malaise.
As a result, many consumer staples stocks are perfect for retirees or conservative investors. So, which consumer stocks make sense today? Here are three that should find a home in your conservative portfolio.
Consumer Staples Stocks To Buy: PepsiCo (PEP)
Dividend Yield: 2.8%
One of the best things about consumer staples stocks is that the top leaders really don’t need any introductions. And that’s what we have with PepsiCo (NASDAQ:PEP). The soft drink and snack-food giant is as American as apple pie with its products finding its way in our fridges and kitchen cupboards. With some of the biggest brands under its umbrella — such as Mountain Dew, Cheetos and Doritos — PEP has become a cash flow and profit machine over the years. Last quarter alone, PepsiCo managed to see sales grow by over 4.3% and management is looking to score 4%-6% organic growth over the full year.
The reason why PEP has been able to keep that growth coming comes down to its evolving product mix.
The firm has been smart in its strategy to move with the times. Sugary sodas are out as consumers have switched to more natural and healthy snacks. For PEP, that’s meant a shift towards teas, juices and other healthy snack foods. Key acquisitions of Sabra Hummus and Stacy’s Pita Chips brands are just some examples. Additionally, PEP has found great success with sparkling water. Its Bubbly brand continues to win over consumers — and the best part is that sparkling water comes with very high margins.
PEP should be able to boost the growth even further. As it hooks millennials with its healthy and organic snacks, it’s courting their children as well. According to Piper Jaffray’s latest “Taking Stock With Teens” survey, Gen Z overwhelmingly prefers PEP’s brands across several categories.
In the end, PepsiCo offers a huge stable of winning brands, cash flows and a growing dividend. It’s exactly what conservative investors would want in a consumer staples stock.
Church & Dwight (CHD)
Dividend Yield: 1.2%
The power of consumer staples stocks lies within their ability to survive recessionary environments. The key is that daily activities still need to happen. Teeth need to be brushed and our clothes need to be washed. But what we use to do those processes can and does change during poor economic health. And that’s where Church & Dwight (NYSE:CHD) can shine.
While Church & Dwight’s corporate name might not be as well-known as other consumer staples giants like Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ), its products certainly are. They include Arm & Hammer baking soda, OxiClean stain-fighting solutions and Trojan condoms. The win for CHD is that many of its brands don’t fall under the premium pricing umbrella. A large bottle of Tide goes for around $17 in my area. The similar-sized Arm & Hammer bottle is only about $10. Last recession, CHD benefited as many consumers migrated down to its lower-priced products. The best part is many stayed there after their fortunes changed during the recovery.
Organic sales growth at the firm has managed to grow at a 3.6% annual rate over the last decade. And thanks to strong cost controls and buybacks, earnings have grown by about 8% per year in that time.
Meanwhile, the firm continues to find other ways to grow. CHD has smartly used mergers and acquisitions to grow its portfolio and it’s become a huge seller on Amazon (NASDAQ:AMZN), partnering with the retailer to boost e-commerce and subscription sales.
In the end, Church & Dwight isn’t as big as many of its rivals, but it does offer a chance to gain growth and stability among the consumer staples stocks.
Dividend Yield: 0.9%
There’s no secret that AMZN and e-commerce are disrupting the model for many retailers. But for those stores that have cult-like followings and offer something different, the times continue to boom. This includes warehouse club Costco (NASDAQ:COST).
Shopping at COST is quite frankly an event. Sure, there’s the bulk offerings, but there’s also plenty of one-time or limited deals, specialty products and its signature Kirkland brand. You literally can get everything from diamond rings to snow tires. And consumers continue to pay some big bucks to be able to access all those deals. COST memberships clock in at about 98.5 million worldwide and even better is that the current membership renewal rate is about 90%.
This creates a stable and predictable base of cash flows for COST. We’re talking $3.4 billion in fee revenue alone. That’s also perfect for conservative investors.
Thanks to rising sales and those hefty fees, COST has become a dividend machine. Since 2004, Costco has raised its payout by 540%. Even better is that COST has a history of paying special dividends to its investors. With cash on its balance sheet growing and management hinting at the cash in their “back pocket,” another payout could be on the way.
For conservative investors, COST’s level of cash generation can’t be beaten in the consumer staples sector.
At the time of writing, Aaron Levitt was long AMZN stock.