If you're looking to invest in the stock market, you may have heard the term "consumer staples stocks."
But what are consumer staples stocks, and why should you consider adding them to your investment portfolio? We will teach you how and why consumer staples stocks are essential. Plus, we will explain how to use these stocks to create a defensive position in your portfolio that will help you minimize the impacts caused by stock loss or economic downturn. Learning about consumer staples stocks will help you build a more solid investment strategy and a more robust investment portfolio.
Overview of Consumer Staples
To start understanding consumer staples, let's briefly answer the question: "What are consumer stocks?" Consumer stocks represent companies that produce goods that you need or want regularly. These companies typically divide up into consumer staples and consumer discretionary stocks. Staple items are things you cannot (or won't) live without, while discretionary items are things you want but aren't necessary to your daily life. When times get tough, consumers will seek out staple items and avoid spending on discretionary items, and that is what gives consumer staples their stability.
Consumer staples, like food, water and personal items, are necessary for daily living. These products are considered staple products because people will continue to purchase them, even during economic downturns. The consumer staples sector has a long history of steady and consistent growth. This stable consistency makes consumer staples stocks an attractive option for investors who are looking for reliable returns over the long term. As a result, consumer staples stocks are considered defensive investments that can help balance a portfolio and provide a source of stability and income. When you talk about consumer staple stocks, you refer to the consumer staples sector, which groups all the consumer staple stocks.
Types of Companies in the Consumer Staples Sector
The consumer staples sector refers to the list of consumer staples stocks, including companies that produce or sell products that consumers regularly purchase, regardless of economic conditions. This sector includes companies that manufacture and sell items considered daily or weekly consumer necessities. As you might have already guessed, the consumer staples stocks list is relatively lengthy, so to help, we have divided it into categories to make it easier to understand.
Beverage Product Companies
A beverage company considered part of the consumer staples sector produces or sells essential items deemed daily necessities for consumers. Consumer staples beverage companies are known for generating steady revenue and profits because these products are in constant demand regardless of economic fluctuations. Types of beverages typically considered to be staples include:
- Bottled water
- Energy drinks
These products are further insulated from loss because they are typically established brand names with fierce customer loyalty. NASDAQ provides examples of excellent consumer staples stocks, including beverage manufacturers like The Coca-Cola Company (NYSE: KO) and PepsiCo Inc. (NASDAQ: PEP).
Food Product Companies
Food is typically considered a general necessity. However, you can only consider some food a staple during recessions or economic downturns — not everything. Food staples refer to foods that comprise the dominant part of a population's diet. Staple food products are items such as:
- Tubers (potatoes, yams, cassava)
Food companies that produce items such as cereal, instant potatoes and meats are great staple investments. These are great investments because when times get tough, and families scale back, they typically return to inexpensive staple foods. Society's natural tendency to return to its roots during tough times puts companies like General Mills Inc. (NYSE: GIS) and Tyson Foods Inc. (NYSE: TSN) on MarketBeat's list of top consumer staples stocks.
Household Product Companies
Household staple products are products used regularly and considered essential to the consumer. Products consumed to maintain a clean home and live a healthy lifestyle are consumer staple household products, including items you probably reach for every day:
- Cleaning supplies
- Food storage bags and containers
- Laundry detergent
- Paper products (paper plates, paper towels, toilet paper)
These products are essential for maintaining a clean and healthy home, and people consume them regularly. Keeping the demand for these products steady and making these products less susceptible to market fluctuations. Many companies that produce these products have established brand names, solid reputations and loyal customers, which make them further resistant to economic instability and sector competition.
Personal Product Companies
Personal product staple companies produce or sell essential personal care products considered daily necessities for consumers. These companies are typically categorized under the consumer staples sector and produce or sell items such as:
- Makeup products
- Skincare products
These products maintain personal hygiene. Consumers buy them regularly, making them less susceptible to the economy's fluctuations. Some examples of personal product staple companies include Unilever PLC (NYSE: UL), The Estee Lauder Companies Inc. (NYSE: EL), and Colgate-Palmolive Co. (NYSE: CL). These companies often provide reliable dividend income and are considered a defensive investment due to their ability to withstand economic downturns.
Staple Retailer Companies
A staple retailer company is a company that operates retail stores that sell consumer staple products. These companies "live" under the consumer staples sector. When reviewing staple retail companies, you want to look at companies that primarily sell staple products:
- Discount grocery stores
- Grocery stores
- Neighborhood markets
The products sold in these markets are often in constant demand and are consumed and purchased regularly. Staple retailers have a significant presence in the retail industry and provide consumers access to a wide range of essential staple products at competitive prices. Some examples of staple retailer companies include Walmart Inc. (NYSE: WMT), Costco Wholesale Co. (NASDAQ: COST), Target Co. (NYSE: TGT) and The Kroger Co. (NYSE: KR).
Tobacco is considered a staple due to its addictive nature. A consumer staple tobacco company is a company that produces and sells tobacco and tobacco-related products. These companies "live" under the consumer staples sector and include tobacco products such as:
- Nicotine infused vapor
- Snuff and snus
Consumer staple tobacco companies often have long-established brand names and fiercely loyal customer bases, making them more resistant to competition and economic instability. However, investing in tobacco companies is often controversial due to the health risks associated with tobacco products, and many socially responsible investors may choose to avoid them. Examples of consumer staple tobacco companies include Philip Morris International (NYSE: PM) and Altria Group (NYSE: MO).
Why Invest in Consumer Staples Companies?
You can invest in consumer staple stocks for several reasons. One of the primary reasons is that consumer staples are considered essential products that people need regardless of economic conditions. Consumer staple companies are less likely to be affected by economic downturns than companies that produce nonessential products. As a result, these companies may provide more stable and reliable earnings even during challenging economic times. Consumer staple stocks create a "defensive position" in your stock portfolio, which helps to stabilize your entire portfolio during market volatility.
Another reason you may invest in consumer staple stocks is that you often provide consistent dividend income, an attraction to income-seeking investors. These companies typically have a history of paying dividends, often considered reliable and sustainable.
In addition, consumer staples companies often have established brand names and loyal customer bases, which can provide a degree of protection against competition. Security can make them more attractive to investors looking for companies with long-term growth potential and stability.
Investing in consumer staple stocks may provide diversification benefits to your portfolio. Investing in various consumer staple companies can diversify your portfolio and potentially reduce risk.
Pros and Cons of Investing in Consumer Staples Companies
Investing in consumer staples stocks has several pros and cons. Consumer staples are products people need to buy regardless of economic conditions, making the sector relatively stable. Additionally, companies producing these products often have established brand names and loyal customer bases, protecting against the competition. On the other hand, the growth potential of consumer staple companies may slow down and be vulnerable to changes in consumer preferences or regulatory changes.
If you're considering investing in the stock market, consumer staples stocks can offer a range of benefits that make them an appealing option for many investors. Let's take a closer look at some of the pros of investing in consumer staples stocks.
- Stability: Consumer staples products are considered essential items, which means that the companies that produce them are less likely to be affected by economic downturns.
- Consistent dividends: Many consumer staples companies pay consistent dividends, making them attractive to income-seeking investors.
- Brand loyalty: Established brand names and loyal customer bases can make consumer staples companies more resistant to competition.
- Defensive investment: Consumer staples stocks are considered defensive investments, which can protect individuals during market downturns.
While consumer staples stocks have many advantages, there are also some potential drawbacks. Here are some of the cons of investing in these types of stocks.
- Limited growth potential: The growth potential of consumer staples companies may be limited compared to other sectors, as the demand for their products is relatively stable.
- Vulnerable to regulatory changes: Consumer staples products are subject to regulations that can impact the industry, making them vulnerable to regulatory changes.
- Changes in consumer preferences: The demand for consumer staples products can change based on consumer preferences, impacting companies' profitability.
- Valuation: Consumer staples companies are often considered less attractive during periods of high valuations due to their lower growth potential.
Consumer Staples ETFs
A consumer staples exchange-traded fund (ETF) invests in companies that produce essential consumer products such as food, beverages, personal care items and household products. Consumer staples ETFs are a type of sector ETF, which means they track a particular sector of the economy.
A consumer staple ETF aims to expose investors to the consumer staples sector without having to pick individual stocks. By investing in a consumer staple ETF, investors can gain exposure to a diversified portfolio of companies in this sector, which can reduce risk and increase returns.
Consumer staple ETFs typically invest in many companies, including large- and mid-cap stocks. These companies often have established brand names, a history of stable earnings and dividends, and a relatively low level of volatility compared to other sectors. These factors make them attractive to investors looking for a more stable and defensive investment option.
The composition of a consumer staple ETF may vary depending on the specific ETF. Some ETFs may focus on companies that produce food and beverages. In contrast, others, like the Vanguard Consumer Staples ETF, may focus on a broader range of companies that make consumer staples products. As a result, investors should carefully consider the composition of the ETF before investing to ensure that it aligns with their investment goals and risk tolerance.
Consumer Staples: A Reliable Choice for Investors
Consumer staples play a crucial role in our daily lives. We use essential products daily, from food, beverages and personal care items to household essentials like cleaning supplies and toiletries. These products are generally resistant to changes in consumer behavior and economic conditions and are considered safe and reliable investments in times of uncertainty.
Companies in the consumer staples sector tend to have stable earnings and predictable cash flows and are known for paying reliable dividends. With a growing global population and an increasing focus on health and wellness, the demand for consumer staples will likely grow in the coming years. This sector presents a compelling investment opportunity for those seeking stability and long-term growth potential.
You might still have a few questions about this vital stock market sector, beyond “What is consumer staples?”. We've put together this FAQ section to help answer any lingering questions. Whether you're a seasoned investor or just starting, this section will provide some clarity and guidance on this critical aspect of the stock market.
What is an example of a consumer staples stock?
Procter & Gamble (NYSE: PG) is an example of a consumer staples stock. P&G is a multinational consumer goods company that produces many products, including personal care items, cleaning supplies, and pet food. These products are considered essential and in demand, regardless of economic conditions, making P&G a popular choice for investors looking for a stable, long-term investment.
What are some consumer staples stocks to buy?
There are several well-known consumer staples stocks that investors can consider buying. Some of the largest companies in this sector include Unilever, Coca-Cola, PepsiCo, Nestle and Walmart. These companies have a long history of stable earnings and dividends and tend to perform well during economic downturns.
What are some consumer staples ETFs to buy?
There are several consumer staples ETFs available for investors to consider, including the Consumer Staples Select Sector SPDR Fund (NYSEARCA: XLP), Vanguard Consumer Staples ETF (NYSEARCA: VDC) and iShares Global Consumer Staples ETF (NYSEARCA: KXI). These ETFs provide exposure to a diversified portfolio of consumer staples stocks and can be a convenient way to gain exposure to the sector.