7 Best Consumer Staples Sector Dividend Stocks

These dividend growth stocks are my top-ranked Consumer Staples sector picks. A few of them trade at reasonable valuations for such high-quality stocks!
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In June, I started a new article series to present the top-ranked dividend growth stocks in each GICS sector. The first article introduced the best dividend growth stocks in the Communication Services sector, while the second article presented the best in the Consumer Discretionary sector. Today, we’ll consider dividend growth stocks in the Consumer Staples sector.

As a dividend growth investor, I look to invest in high-quality stocks trading at reasonable valuations. Additionally, I look to diversify my portfolio by investing in different sectors, so mitigating some risk.

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My watch list for candidates is Dividend Radar, a list of stocks trading on U.S. Exchanges with dividend increase streaks of at least five years. The list is updated and published every Friday and is available for download here. The latest edition (dated June 25, 2021) contains 762 stocks and 42 Consumer Staples sector stocks.

This article presents the seven top-ranked dividend growth stocks in the Consumer Staples sector.

The Consumer Staples Sector

The Consumer Staples sector contains companies that provide essential products, such as food, beverages, and household items. These are products that individuals are either unwilling or unable to cut from their budgets even in times of financial hardship. The Consumer Staples sector typically outperforms the market during recessions and economic downturns. For this reason, stocks in this sector are defensive stocks.

A detailed breakdown of the Consumer Staples sector (source: Dividend.com)

A detailed breakdown of the Consumer Staples sector (source: Dividend.com)

Sector and Performance Comparison

Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Consumer Staples sector compares:

Sector averages of Dividend Radar stocks and the historical performance of sectors • 25 June 2021 (data sources: Dividend Radar • Fidelity Research • Google Finance)

Sector averages of Dividend Radar stocks and the historical performance of sectors • 25 June 2021 (data sources: Dividend RadarFidelity ResearchGoogle Finance)

The table is color-coded to show the highest (green) and lowest (red) values in each column. At 27.2 years, the Consumer Staples sector has the highest average dividend streak of the GICS sectors.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

Sector performance charts (created by the author with data from Fidelity Research, 25 June 2021)

Sector performance charts (created by the author with data from Fidelity Research, 25 June 2021)

The Consumer Staples sector is trailing the S&P 500 in every time frame!

Quality Assessment

I sort the quality scores of DVK Quality Snapshots to rank dividend growth stocks, breaking ties when necessary using the following factors, in turn:

  • SSD Dividend Safety Scores
  • S&P Credit Ratings
  • Dividend Yield

I rarely need to break ties with Dividend Yield.

DVK Quality Snapshots is simple and effective, and I’ve used it since 2019 as a way to assess the quality of dividend growth stocks.

I have my own rating system, which maps directly from quality scores as follows:

DVK Quality Snapshots scoring system and my rating system

DVK Quality Snapshots scoring system and my rating system

Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have scores in the range of 0-14.

Top-Ranked Consumer Staples Sector Stocks

Here are the seven top-ranked dividend growth stocks in the Consumer Staples Sector:

Screen Shot 2021-07-01 at 2.06.14 PM

Note that I’ve highlighted the stocks I own in my DivGro portfolio.

1. The Procter & Gamble Company (PG)

Founded by William Procter and James Gamble, PG is focused on providing branded consumer packaged goods in more than 180 countries. PG has five reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The company was incorporated in Ohio in 1905 and is headquartered in Cincinnati, Ohio.

2. Costco Wholesale Corporation (COST)

Founded in 1976 and based in Issaquah, Washington, COST operates more than 700 membership warehouses in the United States and internationally. The company offers branded and private-label products in a range of merchandise categories. COST also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business.

3. PepsiCo, Inc. (PEP)

PEP is a global beverage and food company. The company distributes beverages under well-known brands such as Pepsi, Gatorade, Mountain Dew, 7UP, Tropicana, and food and snacks under Quaker, Lay’s, Doritos, Cheetos, and Ruffles. PEP was founded in 1898 and is headquartered in Purchase, New York.

4. Colgate-Palmolive Company (CL)

CL is a consumer products company whose products are marketed in more than 200 countries and territories throughout the world. The company operates in two product segments: Oral, Personal, and Home Care; and Pet Nutrition. CL was founded in 1806 and is headquartered in New York, New York.

5. Walmart Inc. (WMT)

WMT is the world's largest retailer and the biggest private employer in the world. Based in Bentonville, Arkansas, and founded in 1962, the company is a multinational retailer with more than 11,000 stores worldwide. Additionally, the company operates e-commerce websites in many countries. WMT operates through three segments: Walmart U.S., Walmart International, and Sam's Club.

6. The Hershey Company (HSY)

Founded in 1894 and headquartered in Hershey, Pennsylvania, HSY is a chocolate and sugar confectionery provider. HSY markets and sells its products to wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires, and department stores.

7. The Coca-Cola Company (KO)

KO is the world's largest beverage company and the leading producer and marketer of soft drinks. Along with Coca-Cola, recognized as the world's best-known brand, The Coca-Cola Company markets four of the world's top five soft drink brands, including diet Coke, Fanta, and Sprite. KO was founded in 1886 and is headquartered in Atlanta, Georgia.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

I also provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Simply Safe Dividends. Finally, with several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

The top-ranked Consumer Staples sector stocks are all high-quality stocks! Unfortunately, except for PEP (trading at about fair value), the stocks are overvalued.

PG is the top-ranked stock in the Consumer Staples sector and is the only stock rated Exceptional. The stock yields a respectable 2.58%, but its 5-year DGR is relatively low at only 3.6%. The company has a distinguished dividend history, with 65 consecutive years of higher dividend payouts! This makes PG a member of an elite group of Dividend Kings, Dividend Aristocrats, and Dividend Champions. I’m willing to pay a premium of up to 10% for stocks rated Exceptional, as they rarely trade below fair value.

COST is one of four stocks with a quality score of 24, so I rate it Excellent. The stock yields only 0.80%, but notice its double-digit percentage 5-year DGR of 11.9%. COST has performed remarkably well over the past ten years, with total returns (including dividends) of 549%, versus the S&P 500’s total returns (as measured by SPY) of 305%. COST is not appropriate for income investors. But growth-oriented investors should consider this stock (when it trades closer to fair value).

On the verge of becoming a Dividend King, PEP is another Excellent stock and the only one trading at about fair value. The stock’s combination of yield (2.94%) and DGR (7.8%) is in a nice sweet spot, and I think the stock offers the best value at its current valuation. Over the past ten years, PEP has underperformed the S&P 500 (SPY) with total returns of 185%. However, if we consider the stock’s performance over the past twenty years, then PEP tops the S&P 500 (SPY) with total returns of 434% versus 414%.

Dividend King CL and soon-to-be Dividend King WMT round out the stocks rated Excellent. Both stocks offer yields below the sector average yield and very modest DGRs. I previously owned WMT, but the small dividend increases eventually moved me to close my position.

I’m looking for stocks with better dividend prospects. I now consider the 5-year Yield on Cost (YoC) of a stock to measure a stock’s dividend prospects. To calculate the 5-year YoC, I determine what the stock would yield in five years if I buy it at today’s price and the company continues to increase its dividend at the present 5-year DGR. Here’s the formula:

  • 5-year YoC = Forward Dividend Yield × (1 + 5-year DGR)^5

Here, ^5 means to the 5th power.

For CL and WMT, the 5-year YoC is 2.56% and 1.76%, respectively. That’s very low considering PEP’s 5-year YoC of 4.28%. In fact, 4.00% seems to be a good target to strive for.

Dividend Contender HSY has a 5-year YoC of 2.57%, so it doesn’t quite make the grade, either. Note also that HSY is overvalued, so now is not a good time to buy the stock, in my opinion.

KO is another member of the elite group of stocks of Dividend Kings, Dividend Aristocrats, and Dividend Champions. The stock is trading about 5% above my fair value estimate, which is a reasonable valuation for a stock rated Excellent. While I own KO, I’ve started asking questions about that ownership. My KO position has returned only about 9% on an annualized basis (including dividends), which is poor relative to the annualized total returns of most of my other positions. With a 5-year YoC of 3.81%, KO is a little below the 4.00% target mentioned earlier.

Concluding Remarks

This article presented the seven top-ranked dividend growth stocks in the Consumer Staples sector.

None of the stocks are discounted, but PEP is trading at about fair value, and two other stocks (PG, KO) are trading at reasonable valuations, considering their ratings. I think PEP offers the best opportunity for dividend growth investors. I like COST for growth-oriented investors, but only below $356.

Next time, we’ll look at the best Energy sector stocks.

Thanks for reading!

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Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!

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