Stock up on stocks that invest in staples

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Anne Kates Smith

How bad would things have to get before you stopped putting ketchup on your fries? What kind of Armageddon would keep you from buying toilet paper, diapers or detergent?

If you can’t imagine life without the products in your pantry, linen closet or laundry room, then you know why shares of companies that make consumer necessities have performed well, even in a dicey economy.

In 2011, Standard & Poor’s 500-stock index returned a mere 2.1 percent, but consumer-staples stocks in the index gained 7.5 percent.

Will staples deliver again this year? In light of some recent positive data, some advisers are casting an eye toward stocks that do better in an improving economy. But staples provide the defensive ballast that portfolios still need in uncertain times like these. Sam Stovall, a strategist at Standard & Poor’s Capital IQ, recommends an outsize position in both economy-sensitive stocks and staples.

Moreover, S&P sees staples firms delivering better earnings growth this year than the typical U.S. firm, and the sector yields 3.1 percent, compared with 2.3 percent for the S&P 500.

Many staples producers operate globally and are well-positioned to benefit from rapidly growing wealth in emerging nations. Plus, rising materials costs should moderate this year, easing pressure on profit margins.

Look at ETFs

Exchange-traded funds (ETFs) are a low-cost way to invest in staples, delivering exposure to a number of companies on the cheap. Consumer Staples Select Sector SPDR (symbol XLP) charges only 0.20 percent of assets per year for expenses. Vanguard Consumer Staples ETF (VDC) charges a hair less, just 0.19 percent.

Both funds hold roughly 20 percent of assets in retailers that derive significant revenues from groceries or from essential drugstore items. The Vanguard and SPDR ETFs each returned 11 percent in 2011.

If you prefer active management, consider Yacktman Fund (YACKX), which holds a fair share of staples. Jensen Quality Growth I (JENIX) is also a good choice.

General Mills and Heinz

If you favor individual stocks, look for companies with a strong product mix and a record of innovation.

General Mills (GIS) is a good example. The stock, about one-third as volatile as the market overall, recently traded at $41, or 15 times year-ahead estimated earnings.

Procter & Gamble (PG) is the quintessential staples company, with more than 20 billion-dollar brands. Since 2001, P&G has doubled its sales from emerging nations. At $65 a share, the stock sells at 14 times estimated year-ahead earnings.

H.J. Heinz (HNZ) makes not only ketchup but also the Ore-Ida French fries and Tater Tots to squirt it on, and Weight Watchers dinners to help take off the pounds afterward. At $52 a share, the stock yields a tasty 3.7 percent.

Anne Kates Smith is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.
© 2012 Kiplinger’s Personal Finance