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 consumer staples sector.
There are some natural benefits to investing in consumer staples stocks. These companies are massive, known for producing consistent revenue growth, and are great about paying dividends to their investors.
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What Are Consumer Staples Stocks?
Consumer staples stocks often get mixed in with consumer goods stocks. Although there are some similarities, there is one key difference. Both consumer goods and consumer staples stocks are centered around the production, manufacturing, and marketing of products to end consumers, or the general population. To be considered a “staple,” the product has to be an essential good that people use on a fairly consistent basis. For example, bleach is a staple product because it is a common household cleaner that many people use regularly.
Consumer staples stocks represent companies that not only produce consumer goods, but have cornered their respective markets. When you’re asked for the best bleach brands, you’re going to start with Clorox, the best-known brand of bleach. Because Clorox is the leader in the bleach and cleaning supplies industry, Clorox is a consumer staple stock.
If you want to know if a stock is a consumer staple, all you have to do is ask yourself whether the company sells a product or group of products that people use regularly and whether the stock represents a leading producer of those products. If the answers to these questions are yes, you’ve found a consumer staple stock.
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 the consumer staples sector.
- 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 sector 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.
- Stability. 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 naturally grow in these stocks as more everyday products are purchased. As a result, consumer staples 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.
- 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 consumer staples 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.
- 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 do not 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.
- 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.
How Much Should You Invest in Consumer Staples Stocks?
Historically, over the long run, consumer staples stocks have generally delivered better-than-average returns, lower levels of risk, and a predictability that adds to peace of mind when investing. Not to mention, when you invest in consumer staples stocks, as a consumer, you already have an intimate knowledge of what the company offers.
Why not just throw all of your figurative investing eggs into the consumer staples basket?
Risks of Investing 100% in Consumer Staples
For some people, going all-in on the consumer staples sector may prove to be a comfortable, long-term strategy. For most, the old adage is true: Never put all of your eggs in one basket. Lack of diversity in a portfolio that consists of only consumer staples stocks opens you up to added risk in two ways.
- Sector-Wide Declines. The benefit to a properly diversified portfolio is that if a single stock or sector starts to take on large losses, your entire portfolio is not at risk. While a sector-wide decline is rare in the consumer staples sector, it does happen. Sector-wide losses generally take place in consumer staples stocks when economic conditions are poor and consumer confidence is down. When this happens, consumers stop spending as much money, causing declines in revenue for consumer staples companies, and leading to a sell-off that could be painful if all of your money is tied up in these stocks.
- Opportunity Cost. While the consumer staples sector is generally known for producing higher-than-average gains over the long run, there are opportunities in other sectors from time to time that have the potential to lead to larger gains than consumer staples. For example, the COVID-19 pandemic led to a flurry of investments in vaccine and treatment development. As such, stocks in the sector saw dramatic gains in value, leaving consumer staples in the dust. If all of your money is tied up in consumer staples stocks, you will miss out on large opportunities like this, ultimately costing you money.
What Percentage of Your Portfolio Should be in Consumer Staples?
Recommending a precise percentage that should be allocated to consumer staples is difficult because there is no one-size-fits-all solution. Every investor has unique financial capabilities, goals, and levels of risk tolerance.
To decide how much of your money should be allocated to consumer staples stocks, there are a few factors to consider.
- Your Age. One of the most popular methods for determining asset allocation percentages in stocks and bonds is using your age. Roughly speaking, your age should represent the percentage of your portfolio that’s invested in bonds. For example, if you are 45 years old, you should have about 45% of your investing dollars in bonds and around 55% of your portfolio in stocks. That means, in this case, the most you should have in consumer staples stocks is 55% of your money, even if you want all of the stocks in your portfolio to be concentrated in this sector.
- Your Appetite for Risk. The lower your appetite for risk is, the higher percentage of your stock investing dollars should be invested in consumer staples stocks. For example, if you have an extremely low appetite for risk, you could meet your goals by putting your entire stock allocation into consumer goods stocks. However, if you have an average appetite for risk, you’ll want to allocate a smaller percentage to consumer goods stocks and a larger percentage of your investing dollars to higher-risk stocks that come with higher potential rewards.
- Economic Conditions. When you revisit your portfolio every quarter, it’s a good time to reassess the state of both the United States and the global economy. Remember that the consumer staples sector is reliant on economic growth. If economic conditions are poor, you might greatly reduce your exposure to consumer staples, as consumer spending is likely to decrease, leading to losses in these stocks. However, if economic conditions are positive or improving, you might consider increasing your exposure to the consumer staples sector to take advantage of a wave of increased consumer spending.
- Your Investing Style. Consumer staples stocks are generally best for buy-and-hold styles of investing. The stability and slow, steady growth seen with these stocks makes them perfect for long-term moves. On the other hand, if your strategy is focused on more active investing, where you look to buy and sell stocks daily, weekly, or even monthly, you aren’t likely to realize the gains you want to see over these short periods. This makes consumer staples stocks less appealing for an active strategy.
- Follow the Leaders. Another tactic is to follow the leaders in the investing space. For example, Warren Buffet, and his fund, Berkshire Hathaway, are heavy investors in consumer staples. To get an idea how to allocate your funds in the consumer staples direction, it’s a good idea to consider diving into their holdings. You can see a full list of Berkshire Hathaway holdings at CNBC. As the experts buy into or sell out of the consumer staples industry, it may be wise to follow them. After all, the analysts at Berkshire Hathaway and other popular funds live, eat, and breathe the stock market.
Investing in Consumer Staples Stocks as a Dividend Play
One of the most attractive aspects of consumer staples stocks is that the companies they represent are known to pay strong dividends. In fact, the dividend yield in these stocks often moves over the 3% mark, making the dividend income hard to ignore.
Nonetheless, if you are looking into consumer staples stocks as a dividend play, it’s important to pay close attention to the dividends declared by the company’s you’re interested in. No publicly traded company is required to pay dividends. Even in the consumer-staples sector, dividends will range wildly from stock to stock and can be subject to change or suspension if the company hits hard times.
So, take the time to get a good idea of the amount of dividends that you can expect. Dig into the dividend history and growth seen over the course of the last several years for any company you’re exploring. If its dividends are not growing alongside revenue and earnings, there are likely better options in the space to consider.
Also, never invest in a company without digging into key metrics. Although dividends may be great, investing in a company that isn’t likely to grow — even one with a strong dividend yield — will end up costing you in the long run. So, even if you’re primarily looking at consumer staples from a dividend standpoint, it’s important to invest only if you believe in what the company is doing and that its activities will lead to long-run growth in overall value.
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 stocks 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.
Do you invest in consumer staples stocks? What attracts you to consumer staples over other sectors?