How to Invest in Consumer Staples Stocks

Companies in the consumer staples segment own among the most recognizable brands in the stock market. Their businesses are relatively easy to understand, and most investors are likely to be repeat customers of many of the businesses behind the stocks. These factors make the industry an attractive place to consider making your own individual stock purchases.

Yet investing in the consumer staples space comes with specific risks and trade-offs that you should know before adding them to your portfolio. Below, we’ll take a comprehensive look at the segment, from the broader industry right down to a few attractive ways to gain exposure to this important part of the world economy…

What is a consumer staple stock?

Consumer staples are products that tend to sit high on a person’s routine shopping list. They span niches like food, beverages, home and personal care, and tobacco. These products are referred to as “staples” to indicate that they’re an essential part of most consumers’ monthly budgets. As opposed to spending on things like vacations and home remodels, which can be put off during lean economic times, a typical household always allocates cash toward essentials like groceries, personal hygiene, and home cleaning supplies.

Consumer staples differ from the “consumer discretionary” industry mainly because of that non-negotiable spending priority. Discretionary spending, as the name suggests, involves purchases such as entertainment and dining out, which are susceptible to wide swings in consumer demand that follow shifts in the broader economy. Demand for things like toilet paper and shampoo, in contrast, doesn’t disappear when a recession hits.

Are consumer staples a good investment?

There are several characteristics that make consumer staples attractive platforms for generating robust long-term investment returns. As mentioned above, the businesses are protected from short-term economic-driven demand swings, and so they tend to grow steadily, regardless of the status of the economy. That’s why stocks in this niche are sometimes referred to as “defensive,” or “recession-proof.” This reputation for dependability is bolstered by the fact that the stocks often pay generous dividends that have a long history of rising each and every year. Coupled with its protected sales, a growing dividend payout can make a collection of consumer staples a stabilizing force in an investor’s portfolio. They work particularly well as a balancing weight against growth stocks.

Consumer preferences are similar across the world, too, and that means successful companies in this space have an opportunity to benefit from huge economies of scale. Their repetitive use, meanwhile, provides a steady stream of demand and the prospect for a deep connection with consumers that can span decades. It’s no surprise, then, that some of the most valuable brands on the planet, like Coca-ColaColgate-Palmolive, and Procter & Gamble‘s Pampers, are all consumer staples.

For investment purposes, consumer staples stocks include producers and manufacturers of these goods, in addition to the distributors and retailing chains that support their businesses.

About the industry

Consumer staples span six industries: beverages (including beer and alcohol), food retailers, food products, household products, personal products, and tobacco. Together, they compose one of the 11 main industry groupings that make up the economy. As of mid-2019, consumer staples stocks accounted for $3.6 trillion of market capitalization, putting them in sixth place in relative size, behind information technology ($8.3 trillion), financials ($7.1 trillion), healthcare ($5.6 trillion), consumer discretionary ($5.4 trillion), and communication services ($4.6 trillion).

The industry has a reputation for outperforming other sectors during the early stages of economic slowdowns and recessions. Conversely, it tends to lag other parts of the economy in periods of robust economic growth. This occurs because these stocks’ defensive nature attracts investors to them during weak economic periods, while people move more toward high-growth businesses during boom times.

The main trends that impact the industry are shifts in consumer preferences, and changes here require companies to constantly work to remain relevant. A major recent shift has been the move away from what’s perceived as unnatural ingredients in food and drinks. This demand change has upended global brands like Diet Coke and forced many companies in the packaged food industry to reorganize their entire portfolios.

Investing metrics to know

When investing in a consumer staples stock, there are a few important metrics you should know. Some of them apply to producers like Coca-Cola while others apply to retailers like…

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