Despite the stock market's growth over the past two years, consumer staples companies have had a tough time keeping up. Driven by "riskier" assets such as financial, energy and technology stocks, the resulting rise in stock prices seems to have past the makers of shampoo, food and beverage products by. So far, the consumer goods sector has been the worst performing market segment in 2011. However, with the recent uncertainty in the Middle East, combined with the various domestic and global issues facing the economy, it may be time for investors to give the safe sector ago.

IN PICTURES: Learn To Invest In 10 Steps

Shampoo, Razors and Mac-n-Cheese
With the return of volatility, it might be time for investors to look towards their pantries for stocks. After all, the companies that produce food, juice and soap may not be exciting, but they tend to be very predictable, and, for the most part, generate positive free cash flows. Their non-cyclical nature makes them perfect additions for a portfolio looking for shelter. Consumers can always put off the purchase of a shiny new 55-inch 3D TV, but toothpaste is much harder to live without. Unlike other sectors of the economy, the demand for the products made by consumer staples companies does not generally slow, and they tend to have a low price elasticity of demand. This produces slow and steady growth that ignores much of the wild ebbs and flows of the consumer spending cycles as they react to the health of the overall economy.

Additionally, consumer staples companies are a great way to hedge yourself against higher commodity prices. Many have increased supply chain and internal efficiencies and have also reduced portions and packaging sizes. These companies can also handle cost inflation is by raising prices. As commodity prices increase, these companies can pass that rise on to the consumer. Consumers will generally complain about any price increases, but odds are they will not give up their morning coffee or quit washing their hair. Finally, consumer staples stability allows many to pay outsized dividends. These dividends help cushion any downturn in the stock market and boost returns in an upswing. Overall, the sector provides exactly the kind of qualities needed for times of trouble or insecurity.

Filling the Pantry and Portfolio
Given all the uneasiness facing the markets, consumer staples are an attractive option for investors looking at ways to stay dry in the storm. With stocks in the sector trading for P/E ratios cheaper than the broad market, adding the sector maybe a great value proposition as well. Investors looking for broad plays on the market segment might want to look at adding the Vanguard Consumer Staples ETF (NYSE:VDC). The fund follows 109 different companies, including soft drink giant Pepsi (NYSE:PEP) and packaged food Kellogg's (NYSE:K) and yields 2.58%. For international consumer staples exposure, investors can use the iShares S&P Global Consumer Staples (NYSE:KXI). Individually, there's plenty of choice as well.

Selling toilet tissue and diapers is a boring business, but those paper products have been driving earnings growth at Kimberly-Clark (NYSE:KMB). One of the company's hallmarks has been its ability to maintain margins in high inflationary years dating all the way back to 1986. Recently, the company received several analyst upgrades and sports a healthy 4.4% yield.

Companies with superior brand recognition and size are able to pass along higher commodity costs to consumers easier than others. Many of HJ Heinz's (NYSE:HNZ) are leaders in their market categories, and the company should be able to pass on commodity increases easily. However, the company isn't resting on its laurels. The company has expanded into emerging markets, such as China and Brazil, with timely acquisitions of FoodStar and Quero Brands. Shares of the ketchup maker yield 3.7%.

With the price of Arabica coffee and the iPath DJ-UBS Coffee ETN (NYSE:JO) hitting new record highs, many consumers are feeling the pinch in their morning cup of joe. However, that shouldn't worry investors in The J. M. Smucker (NYSE:SJM). Its Dunkin Donut brand has achieved cult status, and price increases should be easily absorbed. If not, they consumers can always trade down to its Folgers brand. Shares of Smucker's yield 2.5%.

The Bottom Line
As the markets continue to show signs of volatility and various global issues put pressures on the economy, investors may want to add a bit of a hedge. The consumer staples sector offers big dividends, earnings stability and the safety that investors crave. (To learn more, see our Guide To Investing In Consumer Staples.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  3. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  5. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  6. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Clinical Trials

    Learn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
  7. Mutual Funds & ETFs

    ETF Analysis: First Trust NYSE Arca Biotech

    Learn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares KBW Bank

    Consider an examination and analysis of the PowerShares KBW Bank Portfolio ETF, considered one of the primary financial sector ETFs.
  9. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!