There's no such thing as a "sure thing" in the stock market. But when investors need to protect their portfolios against the winds of uncertainty, they frequently flock to the relative safety of consumer staples stocks.
Small wonder.
The consumer staples sector is made up of companies that produce or sell the basic goods that people need day in and day out.
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During times of economic difficulty — including slowdowns and recessions — people might rein in their spending across any number of categories.
But they still need to eat and keep clean — providing a steadier baseline of demand for consumer staples stocks than many other industries enjoy.
Today, we'll take a closer gander at the sector: How it's defined, why investors seek exposure to it, and how to find the best consumer staples stocks to buy.
What are consumer staples stocks?
The short answer: Consumer staples stocks are companies whose primary businesses involve producing or selling basic goods, such as groceries and personal-care items.
For a more complete answer, let's look to the Global Industry Classification Standard — a framework used by major index providers to help classify public companies.
According to the GICS, the Consumer Staples sector comprises companies primarily engaged in food and staples retail and distribution, such as owners and operators of hypermarkets, super centers and pharmacies.
It also includes companies that produce food, beverage and tobacco products and manufacture household and personal products, such as detergents, soaps, diapers, cosmetics and perfumes.
Why do investors buy consumer staples stocks?
Consumer staples stocks are similar to the health care and utility stocks in that they deal in the business of necessities — items people ultimately must pay for, rain or shine.
As a result, consumer staples are considered to be defensive stocks.
They generate relatively stable revenues, they're not as economically sensitive, and they can produce oodles of free cash — cash that is frequently handed back to shareholders in the form of high dividend yields.
The defensive underlying businesses and those cash payouts are a powerful one-two punch that can provide vital ballast to portfolios during periods of high volatility.
Naturally, there's no guarantee that staples will always hold up their end of the bargain — consumer staples have historically underperformed during a handful of downturns — but they've frequently proven their worth during bear markets.
On a total-return basis (price change plus dividends), consumer staples outperformed the S&P 500 during the Great Recession (-29% to -55%), 2020 COVID crash (-24% to -34%), 2022 bear market (-9% to -21%).
Those were just sector averages; some individual names performed even better.
This protection comes at a price, however — specifically, lesser upside potential during "risk-on" periods for the market.
While consumer staples enjoy high baseline demand, there's not much growth potential during periods of economic expansion.
You're probably not going to buy double the number of diapers or twice as much soap as you need just because things are going well.
That money is likely going toward other expenditures (on the things consumer discretionary stocks provide).
How to find the best consumer staples stocks to buy
We can't tell you exactly what you'd want out of a consumer staples stock — you might prefer larger companies to smaller firms, or you might be insistent on only buying at deeply discounted valuations.
But we can help you start your search with a basic quality screen.
To get to the following list of the best stocks to buy in the consumer staples sector, we looked at those.
Within the S&P Composite 1500: This index is a combination of the S&P 500, S&P MidCap 400, and S&P SmallCap 600.
This screen allows for stocks of different sizes, but it still represents roughly 90% of America's market capitalization, weeding out the smallest stocks.
With a long-term estimated earnings-per-share growth rate of at least 5%: Consumer staples stocks aren't exactly "growthy" stocks, per se, but we still want to buy companies that are able to improve their profits over time.
Remember: Expectations don't guarantee results.
With at least five covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies.
The more research we have at our disposal, the more educated a decision we can make.
With a consensus Buy rating: All the stocks must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale.
S&P Global Market Intelligence converts analysts' ratings into a numerical scale. Anything with a score of 2.5 or less is considered a Buy.
With a dividend yield of at least 1.5%: Dividends are often an important consideration for investors buying consumer staples stocks.
Here, we want to make sure that these stocks produce, at the very least, a little more income than the S&P 500 (current yield: 1.3%).
Company (ticker) | Long-term EPS growth rate | Analysts' consensus recommendation | Dividend yield |
Dollar General (DG) | 6.5% | 2.39 | 2.1% |
Tyson Foods (TSN) | 19.6 | 2.29 | 3.5 |
Kroger (KR) | 6.1 | 2.16 | 1.8 |
Sysco (SYY) | 6.1 | 2.10 | 2.6 |
Keurig Dr Pepper (KDP) | 7.2 | 1.91 | 2.7 |
Philip Morris International (PM) | 11.4 | 1.88 | 3.0 |
Coca-Cola (KO) | 6.1 | 1.62 | 2.9 |
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