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What are 'Consumer Staples'

Consumer staples are essential products, such as food, beverages, tobacco and household items. Consumer staples are goods that people are unable or unwilling to cut out of their budgets regardless of their financial situation. Consumer staples are considered to be non-cyclical, meaning that they are always in demand, no matter how well the economy is performing. People tend to demand consumer staples at a relatively constant level, regardless of their price.

BREAKING DOWN 'Consumer Staples'

Consumer staples stocks can be a good option for investors seeking steady growth, dividends and low volatility. Companies that primarily sell consumer staples include Procter & Gamble, Kimberly-Clark and Phillip Morris. One can invest in consumer staples by purchasing the stocks of consumer staples companies or by purchasing mutual funds or exchange-traded funds (ETFs) that specialize in consumer staples.

Comprising nearly 70% of the nation’s gross national product, consumer spending holds a lot of sway over the economy. Economic growth and decline is typically led by consumer spending, which is cyclical in nature. However, spending on goods produced and sold by the consumer staples sector tends to be far less cyclical due to the low price elasticity of demand. The demand for consumer staples goods remains fairly constant regardless of the state of the economy. With some products, such as food, alcohol and tobacco, demand sometimes increases during economic downturns.

Although there are no substitutes for consumer staples goods, consumers have a lot of options when shopping for the cheapest products. That makes the competition among suppliers very challenging in an environment where commodity prices are rising. To compete on price, consumer staples producers must be able to keep their costs down by adopting new technologies and processes, or they must differentiate by introducing innovative products.

Why Consumer Staples Are Good for Your Portfolio

The consumer staples sector has outperformed all but one sector since 1962. For the 10 years ended March 2018, the consumer staples sector has returned 9.51% annually, beating the 8.79% return of the S&P 500 over the same period of time. More importantly, the consumer staples sector has outperformed the S&P 500 during the last three recessionary periods. Due to their low volatility, consumer staples stocks are considered to play a key role in defensive strategies. Buoyed by the persistent demand of it products, consumer staples companies generate consistent revenues, even in recessionary periods. As a result, consumer staples stocks decline far less during bear markets than stocks in other sectors.

The consumer staples sector also often lures investors with its components' rich dividend yields, which tend to be larger than in other sectors. Because of their slow and steady nature, consumer staples stocks can also not only continue to pay dividends through recessionary periods, but often continue to increase their payouts. The annual dividend rate increase over the 20-year period ended in 2015 is 8%. 

Further, consumer staples are important for diversification. Because these stocks tend to have opposite performance with consumer discretionary stocks in market recessions, they can help being balance to a portfolio. They tend to bring in consistent earnings that support their dividend yields unlike the boom and bust cycles of riskier high-growth stocks, though more growth is available for consumer staples as they expand globally. 

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