Consumers are essential to any economy, and the importance of consumers cannot be underestimated. Any company selling to consumers needs to understand how the end users will receive their products. Understanding how consumers react to various products is prudent for any business to gauge the potential demand for a brand-new product before risking capital on it. Consumer staples are a sub-sector of the market sector known as “consumer goods,” which is part of the broader “non-durable goods” classification. The consumer staples sector comprises companies selling everyday items with little prospect of rapid obsolescence or replacement. In other words, things like toothpaste, soda, beer, cigarettes, toilet paper, etc., all fall under this category. These products have been part of the standard grocery store basket for decades and are unlikely to change much soon. As such, these stocks tend to be stable performers with limited downside risk – making them ideal candidates for investors looking for a defensive or “safe” stock in their portfolio.
Understanding Consumer Staples
A consumer staple is any product with a high demand for continued use among consumers and has limited potential for rapid change in demand over time. Consumption staples include food, drink, clothing, and household items, such as paper products and cleaning agents. The stocks that fall under the consumer staples sector produce everyday consumable products. This includes food items, household items, and beverages. The consumer staples sector represents a wide range of stocks, including Coca-Cola and Procter & Gamble, primarily in the food and beverage space; Gillette, which is in the personal care and household products space; and Kimberly-Clark, which is in the paper products space.
Dividend Stocks
Companies in the consumer staples sector are generally mature and stable entities. They will not see huge growth spurts but also have little to no potential for bankruptcy, given how essential their products are. This makes these companies perfect candidates for dividend stocks. In addition, these companies pay dividends to shareholders, who are usually patient investors willing to accept a bit lower growth for stability. Of course, only some consumer staples companies will pay dividends since each business has to make that decision. When selecting consumer staples stocks, dividend seekers should put those with a long history of paying a consistent or growing dividend on their list of potential investments.
Food and Beverage Stocks
Since consumer staples companies produce consumable goods, food and beverage stocks naturally fit into this sector. In addition, food and beverage stocks produce products vital to human survival, so their demand has been stable throughout various economic cycles. These stocks are also expected to grow as the global population expands. Food and beverage stocks in the consumer staples include PepsiCo, The Coca-Cola Company, General Mills, Nestlé, and Yum! Brands. These mature and stable businesses are expected to generate healthy cash flows in the coming years. When choosing a food and beverage stock, it is important to consider the company’s business model. Is the company a “traditional” food and beverage stock, or does it fall into the “healthy” food and beverage stocks? It is essential to look at the company’s long-term potential for growth.
Tobacco Stocks
Like any other industry, the tobacco sector has evolved over the years. As more and more governments have recognized the health hazards associated with smoking, traditional cigarette companies have had to evolve their business models. These companies now produce smokeless tobacco (chewing tobacco) and vapor products. And while traditional cigarette sales continue to fall, vapor products – including e-cigarettes – are expected to experience significant growth over the coming years. However, the tobacco sector is still a risky bet for investors. These companies are inherently risky, given their products’ potential for negative health outcomes for consumers. That said, tobacco stocks can be great investments for short-term traders. The sector is volatile, and investors can make huge profits by timing the market correctly.
General Consumer Goods Stocks
Some consumer staples companies produce products that are not necessarily essential for life. These are known as general consumer goods stocks. General consumer goods stocks are expected to experience consistent growth over time as the world’s population expands. As large developing nations like China continue to grow economically; more people will adopt a more Westernized lifestyle. General consumer goods stocks are generally mature but often have room to grow. This is because they have been producing products for decades and are expected to continue growing. Some common general consumer goods stocks in the consumer staples sector include Kimberly-Clark, Procter & Gamble, and Unilever.
Concluding Thoughts
The top consumer staples stocks sector is highly defensive and made up of mature, stable, and regularly profitable companies. They generate reliable cash flows and pay dividends, making them ideal for long-term investors. As long as people need essential products like food, beverages, and cleaning agents, these stocks will continue to grow the next generation of Consumer Staples.