- This series is dedicated to building a dividend stock watch list by sector.
- The Consumer Staples sector has the second lowest beta of all the major sectors and it is considered "defensive" in nature.
- The sector is a great breeding ground for high-quality dividend stocks and it is a sector that we suggest an "overweight" allocation in.
- The 5 Consumer Staple stocks highlighted below have and average beta of 0.35 and an average dividend yield of 3.4%.
What Is The DIY Dividend Investors Club?
As fellow do-it-yourself investors, we appreciate the power of collective thought. In fact, the primary reason we love contributing articles on Seeking Alpha is the privilege of discussing and analyzing the market with like-minded individuals. To achieve long-term success, investors must keep an open mind and continuously educate themselves and there is a wealth of knowledge to be gained from fellow contributors, commentors and readers on Seeking Alpha.
The DIY Dividend Investors Club series is dedicated to the open discussion and analysis of building and managing a long-term dividend portfolio.
There's really no right or wrong answer when it comes to stock picking methodology. For those of you that are interested, you can read about our investment philosophy here. That said, to help facilitate the stock picking process we are going to build our portfolio "watchlist" by sector (based on the 9 major sectors in the S&P 500 as well as alternative sectors like MLPs, REITs and BDCs). Below is a tentative schedule of the entire series.
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- Part 1: Introduction/Portfolio Parameters
- Part 2: Stocks That You Could Buy Today
- Part 3: Consumer Staples
- Part 4: Utilities/Telecom
- Part 5: Healthcare
- Part 6: Consumer Discretionary
- Part 7: Financials
- Part 8: Technology
- Part 9: Industrials
- Part 10: Materials
- Part 11: Energy
- Part 12: Master Limited Partnerships ("MLP")
- Part 13: Real Estate Investment Trusts ("REIT")
- Part 14: Business Development Companies ("BDC")
- Part 15: Unveiling the Portfolio
Despite being "defensive" in nature, the Consumer Staples sector has kept pace with the broader market over the past 5 years, with a total return of 128% (vs. a 135% total return for the S&P 500).
More importantly, the sector was also much less volatile than the broader market. We often look at maximum drawdown (peak-to-trough decline) to help us quantify the downside risk of an investment. While the S&P 500 declined over 55% during the 2008 recession, the maximum drawdown for the Consumer Staples sector was a much more modest 32%. Also, the sector has the 2nd lowest beta (0.58) of all the sectors in the S&P 500.
Similar returns with less downside risk...what's not to like about the sector!
Given the characteristics above, the Consumer Staples sector is a great breeding ground for high-quality dividend stocks and it is a sector that we suggest an "overweight" allocation in (15%-20% of total portfolio).
Stocks We Are Watching In The Sector
Below are 5 Consumer Staples stocks that we are watching very closely for a pullback.
Altria Group (NYSE:MO)
The long-term dividend chart above doesn't do Altria justice as the company did a major spin-off (Kraft) in 2007 (which distorted the payout history). That said, MO has been a tremendous dividend growth stock and it probably has one of the longest dividend track records of any stock in existence. Altria is a cash flow machine and it has delivered shareholders a total return of 244% over the past 5 years. It also has one of the highest dividend yields (4.6%) of any stock in the sector!
General Mills (NYSE:GIS)
General Mills has good ratings for Risk/Reward Profile (93), Dividend Track Record (94) and Financial Stability (69). GIS has delivered shareholders a 149% total return over the past five years, and it has increased its dividend at a compound annual rate of 11.7% over that period. In addition, the stock has the lowest beta (0.15) of the group, with a decent dividend yield of 3.0%.
Kimberly-Clark Corp. (NYSE:KMB)
Kimberly-Clark has a decent current dividend yield (3.0%) and a very respectable 5- and 10-year dividend growth rate of 6.9% and 8.7%, respectively. KMB has also performed well over the past 5 years, with a total return around 163%. All that with an ultra low beta of 0.23!
PepsiCo has great ratings for Financial Stability (81) and Dividend Track Record (91) and it has increased its dividend at a compound annual rate of 13.5% over the past 10 years. In fact, the company has paid consecutive quarterly cash dividends since 1965, and 2014 marked the company's 42nd consecutive annual dividend increase. This is another decent core stock for a retirement portfolio, in our opinion.
Clorox Company (NYSE:CLX)
Clorox has delivered shareholders a total return of 89% over the past 5 years driven by a compound annual dividend growth rate of 9.1%. CLX has increased its dividend to shareholders every year since 1977. In addition, the stock has had a very modest maximum drawdown during the past recession of 28.4%, which has allowed CLX investors to sleep very well at night.
What's In The "Buy Zone"?
Unfortunately, none of these great Consumer Staple stocks are currently in their respective "Buy Zones". However, we will be watching our "Buy Zones" closely and we'll be ready to pull the trigger when the opportunity presents itself.Summary
Any DIY Dividend Portfolio should include several stocks from the Consumer Staples sector. Stocks in this sector tend to be stable dividend payors with low relative betas, which will help dampen overall portfolio volatility.
FEEDBACK REQUEST: Which Consumer Staple stocks are currently on your watch list? Which would you buy today? Please comment below!