The consumer staples sector is a favorite among some of the biggest players in the investing community. Warren Buffett is known for keeping a large portion of his investing dollars in the sector.
There are some natural benefits to investing in the best consumer staples stocks. These companies are massive, known for producing consistent revenue growth, and are great about paying dividends to their investors.
What Are Consumer Staples Stocks?
Consumer staples stocks represent companies that manufacture and sell products sold under household name brands.
For example, Procter & Gamble is a consumer staples company that manufactures and sells health and hygiene products like Crest toothpaste and Luvs baby diapers. Even in times of tough economic conditions, Procter & Gamble and its investors will benefit from the fact that the average consumer isn’t willing to go without brushing their teeth and won’t let their child fester in a soiled diaper. Because it’s a consumer staples company, Procter & Gamble has an economic shield.
This shield Procter & Gamble has was on full display in 2020, when the COVID-19 pandemic rattled global markets. Although the stock dipped in February and March, the declines experienced were minimal compared to overall markets. Moreover, the stock recovered quickly, ending the year 2020 with gains of about 13.5% during a year when the Dow Jones Industrial Average generated a return of 9.7%.
Other consumer staples stocks are cyclical, meaning that they react to the cycles of the economy.
For example, Coca-Cola is a consumer staples stock that produces and sells nonalcoholic beverages. However, the company saw tremendous declines as a result of the COVID-19 pandemic as consumers were unable to eat out at restaurants — a significant portion of the soft drink business — and opted for lower cost drinks at home such as water.
Breaking a Common Misconception
There is a common misconception that consumer staples provide protection from economic declines. However, that’s not always the case. Consumer staples are made up of both consumer necessities and consumer discretionaries.
Although consumer necessities are noncyclical — think toothpaste, soap, and cleaning supplies — by contrast, consumer discretionaries like soft drinks and luxury clothing are highly cyclical and will generally experience heavy declines during tough economic conditions.
Subcategories of the Consumer Staples Sector
As with any other sector of the stock market, the consumer staples sector is made up of multiple smaller subcategories. These subcategories include:
In order to access the products they need, consumers shop at a wide range of retailers. These retailers are considered consumer staples because they are the go-to outlets for the products that consumers use in their day-to-day lives. Some of the most popular retailers in the consumer staples category include:
- Walmart (WMT). Walmart is one of the largest retailers in the world. While the company offers plenty of consumer discretionary products, it is also the home of necessary consumer staples products like food, cleaning supplies, and toilet paper.
- Costco Wholesale (COST). Costco is a wholesale club that provides discounts to consumers for buying food, toiletries, and other consumer goods in bulk. Like Walmart, the company offers a wide range of both necessary consumer staples and consumer discretionary products.
- Amazon.com (AMZN). Amazon.com was transformed into a consumer staples stock during the COVID-19 pandemic. Like others on this list, the company offers plenty of consumer discretionary products. However, when the COVID-19 pandemic caused stay-at-home orders, Amazon.com became an indispensable source for necessities for high-risk consumers that didn’t feel safe shopping in brick-and-mortar stores.
2. Food and Drink
Could you imagine life without something to eat or drink? It wouldn’t last very long. The companies that offer food and drink products are often strong performers in the consumer staples sector. Some of the most popular include:
- General Mills (GIS). General Mills is most well known for its cereal brands, but the company is far from a one-trick pony. The company manufactures and distributes products under many popular brands, including Gold Medal Flour, Betty Crocker, and Yoplait.
- Coca-Cola (KO). Coca-Cola is one of the most well known brands in the world. Known for its Coca-Cola brand soda, the company also has a long line of diversified products including Fanta and Sprite. However, the company’s core focus on the non-alcoholic beverages market didn’t bode well during COVID-19.
- PepsiCo (PEP). PepsiCo is another company known for its cola brand, Pepsi. However, the company operates in areas outside of non-alcoholic beverages. In fact, it’s food brands like Fritos, Lays, and Quaker helped the company maintain shareholder value, even in the face of the COVID-19 pandemic.
3. Beauty and Hygiene
While you won’t die if you don’t put on your makeup, many consumers view beauty products as a necessity. Furthermore, hygiene products like toothpaste, shampoo, and body wash will be in high demand, regardless of the state of the economy. Some of the most popular stocks in the beauty and hygiene subcategory of the consumer staples sector include:
- Procter & Gamble (PG). Procter & Gamble is the company behind Crest toothpaste, Charmin toilet paper, and Tide laundry detergent. The company also offers a wide range of consumer staples products in the beauty category, such as Covergirl and Olay.
- Estee Lauder (EL). Estee Lauder is the company behind popular beauty brands such as Aveda, Aramis, and Clinique. Unlike Procter & Gamble, the company’s core focus is on beauty and hygiene products.
4. Adult Consumer Staples
Although most parents discourage their kids from picking up their first cigarette or alcoholic beverage, these products have become consumer staples in their own respect. There is a large percentage of the United States adult population that uses tobacco or alcohol regularly. Some of the top stocks in this category include:
- Altria Group (MO). Altria Group is the largest tobacco company in the United States. The company owns Phillip Morris, the maker of Marlboro cigarettes, and U.S. Smokeless Tobacco.
- Ambev (ABEV). Ambev is an alcoholic beverage company. It’s the company behind brands like Skol, Brahma, and Presidente.
Pros and Cons of Consumer Staples Stocks
As with any sector, consumer staples come with their own pros and cons. The low volatility and predictable returns of the sector generate plenty to think about but come with some drawbacks.
Pros of Consumer Staples Stocks
When some of the world’s most successful investors take interest in a sector, it’s for a reason. There are several benefits to investing in consumer staples.
1. Highest Long-Run Returns of Any Sector
This is one of the biggest reasons that consumer staples are a large part of Buffett’s portfolio. According to Medium, most investors don’t realize that the consumer staples industry has generated the largest returns of any sector over the long term. Long-term investing is all about making your money grow over time, after all.
Consumer staples stocks are known for incredibly stable growth. The idea is that the products sold by these companies have been ingrained into the day-to-day lives of consumers. So naturally, as the population and its wealth grow, sales and revenue will grow in these stocks as more everyday products are purchased.
As a result, these stocks aren’t just known for the large long-run gains that they generate; they’re also the sector that has seen the least volatility historically. Although stocks will rise and fall from day to day, single-session gains or declines in this group are generally minimal, making these stocks easier to predict and less likely to generate any sudden, significant declines.
3. Investing in What You Know
Finally, consumer staples are so named because their products are important parts of the day-to-day lives of the average consumer. Therefore, when you invest in this category of stocks, you’re investing in companies that you probably know something about.
Because informed investment decisions tend to be the best, investing in companies that you already know about gives you a strategic advantage in the market.
Cons of Consumer Staples Stocks
As is always the case in the stock market, you can’t have reward without risk. Even in the consumer staples sector, there are a couple of negatives to consider.
1. No Fast-Paced Returns
Some investors enjoy investing in tech because its highly volatile nature allows for short-term trades that, when made properly, can lead to fast-paced returns. Although consumer staples stocks are known for large, long-run returns, they don’t tend to make big single-session, single-week, or even single-month moves. Instead, returns are generally seen over a longer period of time through a slow, steady climb.
2. Economic Dependency
Consumer staples stocks are dependent on growth in consumer spending. After all, when consumer spending slows, these companies can expect to see slowing growth in revenue, leading to declines. Over the long run, consumer staples are known for strong growth, but losses can be painful from time to time, especially during times of economic hardship.
Consumer staples stocks are attractive, and most investors should have at least a small portion of their portfolio dedicated to them. However, it’s also important to consider your unique goals, financial capabilities, and risk appetite when deciding just how much of your money to invest in these stocks.
Also keep in mind that — as with any industry — not all consumer staples investments are created equal. Simply knowing the company is a household name isn’t enough evidence that the stock will grow and should not be the basis for an investment decision. Always take the time to do your research and make educated investing decisions, regardless of the sector you’re investing in.