The term consumer staples refers to essential products used daily, including foods and beverages, household goods, and hygiene products, and even items like alcohol and tobacco. These products are commodities that people consistently purchase regardless of their financial situation.
Consumer staples are considered non-cyclical, meaning they always experience demand, irrespective of the economic climate. Due to their resilient nature, these products are less susceptible to economic fluctuations, creating a consistent need among consumers regardless of their cost.
Key Takeaways
- Consumer staple stocks represent non-cyclical companies, producing always-in-demand goods or services.
- Known for steady yet modest growth, the consumer staple sector is attractive to investors during economic recessions.
- Ideal for investors seeking consistent growth, robust dividends, and low volatility.
Understanding Consumer Staples
Consumer spending, forming about 70% of the gross national product (GNP), significantly influences the economy. Unlike other sectors influenced by cyclical spending habits, consumer staples benefit from constant demand due to their low price elasticity of demand—customer demand remains steady despite price fluctuations or economic downturns.
Inside the Consumer Staples Sector
The sector comprises companies engaged in diverse activities, including pharmaceuticals distribution, crop production, and more. In the S&P 500 Index, consumer staples are divided into six major industries:
- Beverages
- Food and staples retailing
- Food products
- Household products
- Personal products
- Tobacco
Additionally, strong competition among providers requires cost-effective operations or innovation to remain profitable amidst increasing commodity prices.
Financial Performance of Consumer Staples
Since 1962, the consumer staples sector has been a top performer, often aligning closely with the S&P 500. Most importantly, it has outperformed the S&P 500 during the last three recessions. Its low volatility makes it a crucial part of defensive investment strategies.
Investing in Consumer Staples
Thanks to consistent demand, even during recessions, consumer staples maintain stable revenues. Consequently, these stocks see smaller declines in bearish markets and, in some cases, record increased demand for specific items like alcohol and tobacco. The attraction to these stocks also stems from their reliable and often growing dividend yields.
For instance, throughout the 2020 economic crisis, the dividend yield for State Street’s Consumer Staples Sector Index ETF (XLP) rose from 2.74% to 3.00%, due to the same dividend payout against falling stock prices.
Furthermore, consumer staples contribute to a balanced portfolio, complementing typically cyclical stocks from other sectors by the consistent earnings and dividend yields they offer.
Pros
- Steady dividends and earnings
- Low volatility
- Low risk
- Safe haven during recessions
Cons
- Slower growth
- Limited peak performance
- Underperformance when interest rates rise
Investing in renowned consumer staples companies like Procter & Gamble (P&G), B&G Foods (BGS), Kimberly-Clark (KMB), and Phillip Morris (PM) is one way to engage with this sector. Alternatively, mutual funds or exchange-traded funds (ETFs) offer a diversified approach to investment in this category.
Real World Example of Consumer Staples
Major investment firms typically offer consumer staples options. For example, Vanguard provides VDC, a consumer staples ETF, and a Consumer Staples Index mutual fund. Invesco offers PBJ, a dynamic food & beverage ETF, and a general S&P SmallCap Consumer Staples ETF.
For those interested in global stakes, investment vehicles such as the WisdomTree Emerging Markets Consumer Growth ETF (EMCG) and the iShares Global Consumer Staples ETF (KXI) expand opportunities beyond domestic borders.
Related Terms: Economy, Investment, Dividends, Consumer Goods, Recession.
References
- S&P Dow Jones Indices. “S&P 500 Consumer Staples”.
- S&P Dow Jones Indices. “S&P 500”.
