4 reasons to like consumer staples stocks

Stocks in this sector have historically produced relatively high returns and low volatility.

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The consumer staples sector is home to many of the products we use every day, such as toothpaste, soft drinks, diapers, and many other household items. Because of their commonplace nature, consumer staples can sometimes be overlooked by investors who are drawn to more “exciting” opportunities like smartphone technology, Internet start-ups, or the latest restaurant IPO. But when it comes to investing, “boring” can often be better, and no sector embodies that spirit more than consumer staples.

Here are four features of the consumer staples sector that investors may find surprising.

1. A sector leader in returns

Although it is populated by companies that seem plain vanilla and don’t excite as much with new technologies, consumer staples has had the second-highest return of the 10 economic sectors since 1962.1 During the past 50-plus years, consumer staples has had an annualized return of 12.9% (see chart below, left). That’s almost 200 basis points (2.0%) per year better than the technology and consumer discretionary sectors, and it also beat the broad stock market (as measured by the Russell 3000 Index) by a similar margin.

One reason consumer staples have performed so well over the long term is the sustained “brand” of many of the companies throughout the sector. In other words, many of the leading household brands from 50 years ago are still leading brands today. This presents a significant barrier to entry for new companies trying to enter established consumer staples industries, making it exceedingly difficult to knock market leaders off their perch.

2. Downside protection in volatile markets

In addition to producing the second-highest return, consumer staples has had the second-lowest volatility of any market sector since 1962 (see chart above, right), meaning it has produced more consistent returns from one year to the next. This is likely driven by the more consistent nature of the demand for everyday staples items such as toothpaste and diapers, which people tend to buy in similar amounts regardless of the ups and downs of the economy. Because of this, investments in consumer staples have tended not to lose as much during bear markets as investments in other sectors. And during the past 50 years, consumer staples has experienced fewer bear markets (a correction of more than 20%) than the broad stock market overall, and is tied with utilities for the fewest bear markets of any equity sector.2

For investors seeking to reduce risk, consumer staples stocks can lend stability to an equity portfolio due to the relatively consistent nature of consumer demand and the consistent earnings for staples companies. This stability becomes particularly appealing during weak periods for the stock market. Dating back to 1996, the worst three-year stretch for the sector was an annualized return of –1%, compared with –16% for the broad stock market.

3. May provide more income than other investments

The consumer staples sector has characteristics that can make it an attractive building block for income-oriented investors. Consumer staples tend to have stronger dividend yields and dividend growth than other equity sectors, and their yields are often competitive with those of non-equity investments. Also, unlike most bonds where the interest payments are fixed, many staples stocks have successfully increased their dividends every year, including in difficult economic periods like 2008 and 2009. In fact, the average staples company has increased its dividend at an annual rate of 8% over the past 20 years (see chart below, left).

4. Multiyear international expansion opportunity

In the U.S., the opportunity for consumer staples is fairly mature—Americans tend to buy the same amount of toothpaste and laundry detergent every year, so volumes across the sector grow roughly in line with the annual population growth of about 1%. But it’s important to remember that the U.S. represents only about 5% of the world’s population, and the other 95% have many of the same needs and wants that consumer staples products address. With incomes on the rise for consumers living in places like China, India, Indonesia, and Brazil, we have seen spending on consumer staples items growing much faster than the growth rates in their populations and the growth rates in the U.S. (see chart above, right).

In addition to purchasing more and better-quality staples items, emerging-market consumers are also buying more discretionary items, such as washing machines. This in turn further boosts spending on consumer staples such as laundry detergent. As incomes continue to increase in the coming decades, the growth potential for many staples companies in emerging markets remains a massive opportunity.

Investment implications

Looking forward, I believe there are ample stock opportunities that may help the consumer staples sector continue to outperform the broader U.S. equity market in the months and years ahead. Additional volatility in global economies, interest rates, and currencies could drive investor uncertainty and would likely benefit the sector, which has historically been an attractive target in a flight to safety. In any event, consumer staples should continue to benefit from its reputation for steady growth, dividend income, and low volatility.

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About the author
Robert Lee is a portfolio manager for Fidelity Investments. He currently oversees several consumer staples sector portfolios and subportfolios. Fidelity Thought Leadership Vice President Matt Bennett provided editorial direction for this article.
Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, contact Fidelity for a free prospectus or, if available, a summary prospectus. Please read it carefully.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
1 1962 marks the first year for which index data is available.
2 Source: Haver Analytics, Fidelity Investments, as of Jan. 31, 2015.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
References to specific investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice.
Investing involves risk, including risk of loss.
Past performance and dividend income are historical and do not guarantee future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
All indexes are unmanaged. You cannot invest directly in an index.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.
The consumer staples industries can be significantly affected by demographic and product trends, competitive pricing, food fads, marketing campaigns, environmental factors, government regulation, the performance of the overall economy, interest rates, and consumer confidence.
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The S&P 500 Index is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of Standard & Poor’s Financial Services LLC. Sectors and industries are defined by the Global Industry Classification Standard (GICS®).

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Russell 3000® Index is a market capitalization-weighted index designed to measure the performance of the 3,000 largest companies in the U.S. equity market.
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