The euro crisis is back. (In fact, it never went away.) And investors are doing the unthinkable…
In search of safety, they’re selling stocks and flocking to U.S. Treasury bonds. And the rush of buying on Monday pushed the yield on 10-year Treasuries down to a paltry 3.08%.
Now, I get that people are scared. But I don’t care how bad the situation gets in the eurozone. The last thing I’d be buying is U.S. Treasuries.
Instead, I’d be scooping up shares of companies in the consumer staples sector. Here’s why…
Don’t Put a Premium on a Government Guarantee
The main selling point for Treasuries is that they’re backed by the full faith and credit of the U.S. government. In other words, they’re supposed to be safe.
But we can say the same about consumer staples stocks. After all, no matter what’s happening in the world, demand for food and products like bathroom tissue, diapers and paper towels will continue.
I mean, I didn’t stop buying diapers for my toddler because of the housing slump. I never stopped eating during the recession (we Italians love to eat, after all). And I didn’t stop using paper towels the day Lehman Brothers went under, either.
Did you? I didn’t think so.
As you well know, there’s no way to stretch out how long such products last, either. Once you’ve used them, you have to buy more. There’s no choice.
In short, consumer staples companies benefit from the most stable demand in the world. Sure, they sell boring products. But they’re essential ones. And if that’s not safe, I’m not sure what qualifies.
But here’s the real reason to opt for consumer staples stocks over Treasuries…
It’s All About the Yield!
How do you feel about getting a 3% return on your capital for 10 years?
Pretty weak, right?
Well, that’s just what investors are doing if they buy Treasuries at current prices.
I mean, wouldn’t it be smarter to buy another safe asset that promises to pay a higher yield over time?
Valued at $26 billion, Kimberly-Clark is a leading player in the health and hygiene industry. In each category of items that it sells, it boasts the No. 1 or No. 2 market share position in North America. And sales have actually increased from the start of the recession.
Kraft Foods is the largest packaged food company in North America. Its products are found in 99% of U.S. households. And it boasts nine leading brands, each worth more than $1 billion in annual sales.
So it’s no surprise that both companies also have a history of increasing their dividends. In fact…
- Kimberly-Clark has raised its dividend for 39 straight years… and counting.
- Kraft Foods has hiked its dividend every year but one over the last decade.
Not to mention, at current prices, both stocks yield more than 10-year U.S. Treasuries. (Kimberly-Clark yields 4.1%, while Kraft yields 3.3%.)
And I assure you… those yields are just as safe and reliable as those offered by U.S. Treasuries. Why?
Because both companies are fiscally fit. They generate more than $2.5 billion in cash flow each year and sport dividend payout ratios of less than 70%, leaving more than enough of a buffer to keep paying a dividend throughout all market conditions.
And the fact that we can buy these consumer staples stocks on the cheap – for about 14 times forward earnings – only makes the opportunity more compelling.
Treasuries Don’t Stack Up to These Two Consumer Heavyweights
Bottom line: If you’re hungry for a safe, reliable yield, forget U.S. Treasuries and consider the consumer staples sector instead.
More specifically, with super safe demand… decent yield income (and the strong likelihood of a raise each year, too)… plus the prospect for capital appreciation, U.S. Treasuries just can’t compete with two blue-chip heavyweights in Kimberly-Clark and Kraft Foods.
Over the next decade, I’m convinced that both stocks will provide more safety and income than 10-year U.S. Treasuries.