The 3 Best Consumer Staples Stocks for a Defensive Strategy

December 03, 2024 at 07:30 AM EST

Costco Gold Star Membership card held against a black background. — Stock Editorial Photography

Although the Consumer Staples Select Sector SPDR Fund (NYSE: XLP) has underperformed the broader market this year, with a modest 14.7% YTD gain, momentum appears to be shifting. While the sector lacks the allure of high-growth areas like technology or artificial intelligence, it remains a favorite for long-term investors due to its defensive nature.

From a technical perspective, the XLP ETF recently broke above its 50-day and 5-day converging moving averages, signaling renewed upward momentum. As the sector appears to be embarking on a new leg in its uptrend, could now be the time to gain exposure to consumer staples?

The Sector’s Appeal to Investors

Consumer staples are a cornerstone for investors seeking stability. These companies produce everyday essentials like food, beverages, and personal care items that are always in demand, making them less susceptible to market fluctuations. During economic downturns, when consumers cut back on discretionary spending, demand for staples remains steady, offering a defensive hedge against volatility.

Many top consumer staples stocks are market leaders with established brands, consistent profitability, and resilient revenue streams. These attributes make them attractive for long-term investors, particularly those focused on dividends. Most companies in this space prioritize returning value to shareholders through regular dividends, making them popular among income-focused investors. Moreover, the sector features global brands that have been around for decades, if not centuries, offering a legacy of reliability in uncertain times.

3 Consumer Staples Stocks to Consider

XLP: A Top ETF for Consumer Staples Sector Exposure

The Consumer Staples Select Sector SPDR Fund (NYSE: XLP) is a strong choice for investors seeking broad exposure to the sector. With a low expense ratio of 0.09% and a dividend yield of 2.23%, XLP provides a cost-effective and diversified approach. The ETF tracks the Consumer Staples Select Sector Index, holding over 40 of the largest consumer staples companies globally, including Costco, Walmart, Coca-Cola, and Procter & Gamble. This diversity and its passive nature make it an ideal option for long-term investors aiming to minimize risk while gaining sector exposure.

For those who prefer individual stock investments and are comfortable with slightly more risk, here are two standout names:

Procter & Gamble: A Global Leader in Consumer Staples

Procter & Gamble (NYSE: PG) is a household name with a portfolio of iconic brands such as Tide, Pampers, Gillette, and Crest. Operating in over 70 countries and selling products in over 180 markets worldwide, the company is a model of global consumer staples dominance. Its focus on innovation and consistent growth has made it a staple in many portfolios.

PG has outperformed the sector this year, with the stock up over 22% YTD. It also offers an attractive dividend yield of 2.25%, slightly above the XLP ETF’s. Sentiment remains bullish, with analysts rating the stock a Moderate Buy. DA Davidson recently upgraded PG to Buy, raising its price target to a street-high $209. With its established brand portfolio and consistent financial performance, PG continues to attract long-term investors seeking stability and growth.

Costco: Largest Holding in XLP ETF With 10.25% Allocation

As the largest holding in the XLP ETF, Costco (NASDAQ: COST) represents 10.25% of its portfolio and has been a standout performer, with its stock up nearly 50% YTD. Its strategic initiatives to improve membership retention and revenue growth support Costco's momentum. Recent measures, such as tightening membership card usage and implementing ID verification, have driven a double-digit increase in memberships at test locations. Analysts estimate these changes could add up to 4 million new members, a 5% boost to its membership base.

Additionally, Costco raised its membership fees in September, further strengthening its recurring revenue stream. The standard membership now costs $65, while the Executive membership is $130. Like PG, Costco has a Moderate Buy analyst rating and continues to show positive sentiment. Its strong fundamentals and aggressive growth strategies make it a compelling pick for investors looking to capitalize on the sector’s momentum.