Consumer Staples
What Do You Mean When You Say "Consumer Staples"?
A group of key items utilised by customers is referred to as consumer staples. Foods and drinks, as well as domestic items and hygiene products, as well as alcohol and cigarettes, fall under this category. These are the items that individuals can't — or won't — remove from their budgets, regardless of their financial circumstances.
Consumer staples are considered non-cyclical, which means that they are constantly in demand, regardless of how well the economy is doing — or not doing. As a result, consumer staples are unaffected by economic cycles. Also, regardless of price, individuals tend to desire consumer essentials at a consistent level.
TAKEAWAYS IMPORTANT
Non Cyclical corporations are represented by consumer staple stocks, which create or sell items or services that are constantly in demand.
The consumer staples sector, which is characterised by consistent but unspectacular growth, is a sanctuary for investors during recessions.
Investors wanting sustainable growth, substantial dividends, and minimal volatility might choose consumer staples companies.
Consumer Staples: The Fundamentals
Consumer spending, which accounts for about 70% of the country's GNP, has a significant influence on the economy. Consumer spending, which is cyclical, often drives economic growth and collapse. Cyclical implies that there are ebbs and flows, or periods when the consumer spends more and periods when they spend less.
Due to the lower price elasticity of demand, expenditure on commodities manufactured and sold by the consumer staples industry is significantly less cyclical. Price elasticity is a term used in economics to explain how consumer quantity demand changes when prices vary. Regardless of the health of the economy or the cost of the product, demand for consumer staples stays relatively consistent.
The Consumer Staples Industry's Make-Up
The industry includes firms that offer pharmaceutical products, such as drugstores, as well as enterprises that manufacture and grow crops. Consumer staples are divided into six industries in the S&P 500 Index:
Beverages
Retailing of food and basics
Products related to food
Products for the home
Personal care items
Tobacco
Although there are no replacements for consumer basics, customers have a plethora of choices when it comes to finding the best deals. In a climate where commodity costs are growing, this makes supplier competitiveness extremely difficult. Producers of consumer staples must be able to keep prices down by adopting new technologies and processes, or differentiate themselves by providing novel items, in order to compete on price.
Financial Performance of Consumer Goods
Since 1962, the consumer staples sector has outpaced all but one. According to the S&P Dow Jones Indices, the consumer staples sector returned 8.20 percent annually for the majority of the ten years ended April 26, 2021. 1 In comparison, the S&P 500 returned 11.86 percent over the same time period. 2 However, they tend to move in lockstep with one another.
More crucially, the consumer staples sector has outperformed the S&P 500 over the previous three recessions—i.e., when the economy has grown at a negative rate (GDP). Consumer staples stocks are seen to be important in defensive strategies because of their low volatility.
Consumer Staples Investing
Consumer staples firms earn constant income, even during recessions, because of sustained demand for their products. As a result, consumer staples stocks fall significantly less than other sectors' equities during downturn markets. During economic downturns, demand for some things, such as food, alcohol, and cigarettes, might actually grow.
Investors are generally drawn to the consumer staples sector by the high dividend yields offered by its constituents, which are often higher than those offered by other sectors. Consumer staples companies may not only continue to pay dividends throughout recessions, but also typically grow their payouts, thanks to their gradual and steady character. The yearly dividend rate climbed 8% over the 20 years ending in 2015, according to "Dividend.com."
If the dividend amount does not increase in tandem with the increase in stock price, dividend yields will decline. In contrast, if equities decline in value but the dividend payout remains the same, the dividend yield rises. When stock prices plummeted in the aftermath of the 2020 economic crisis and lockdown, the yield on State Street's Consumer Staples sector index ETF (XLP) jumped from 2.74 percent to 3.00 percent, owing to lower-priced shares paying the same dividend.
Consumer staples are also beneficial for portfolio diversity. In addition, because these companies tend to outperform the consumer discretionary category during market downturns, they can assist to balance a portfolio. Unlike the boom and bust cycles of riskier high-growth stocks, they tend to generate constant earnings that maintain their dividend payouts, however consumer staples have more growth potential as they expand overseas.
Pros
Consistent dividends and earnings
Little turbulence
Low danger
In a downturn, it's a good idea to have a safe haven.
Cons
Slow progress
Only a few highs
When interest rates rise, underperformers emerge.
Consumer staples stocks are a fantastic choice for investors looking for consistent growth, consistent dividends, and minimal volatility. Consumer staples can be purchased as individual stocks, mutual funds, or exchange-traded funds (ETFs)—industry giants include Procter & Gamble (P&G), B&G Foods (BGS), Kimberly-Clark (KMB), and Phillip Morris (PM)—or as mutual funds or exchange-traded funds (ETFs) that specialise in the area.
Consumer Staples in the Real World
Many of the big investing firms have a consumer staples strategy. VDC, a consumer staples ETF, and a Consumer Staples Index mutual fund, for example, are available from Vanguard. Invesco offers PBJ, a dynamic food and beverage ETF, as well as S&P SmallCap Consumer Staples, a more comprehensive ETF.
Furthermore, the WisdomTree Emerging Markets Consumer Growth ETF (EMCG) and the iShares Global Consumer Staples ETF (KXI) are two possibilities if you want to try investing internationally—after all, people need staples all over the globe.
