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. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  3. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  4. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  5. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  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. 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 >>

You May Also Like

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!