I recently eliminated one of my holdings in the consumer defensive sector and need to replace it in order to maintain my diversification goals. I sold off General Mills NYSE:GIS as it was not meeting my criteria for holding it in my portfolio anymore.
I have 2 options with respect to the consumer defensive stocks, I either:
- Increase my position in an existing holding
- Add another holding to my portfolio
Before increasing a position, I want to evaluate the options I have and see if there is a gem to invest in.
Sector classification is driven by a set of standards across North America, stock market and indexes. There is a specific company classification referred to as NAICS (North American Industry Classification System) managing a set of classifications. Statistic Canada is also a partner with defining the NAICS with company counts for different classifications.
While the company classification is critical to understand the evolution of industries, it is by far too detailed to manage for investors and all companies can be grouped under a sector. The best visual tree I could find is under Wikipedia's Global Industry Classification Standard.
|Basic Material||Chemicals, Construction Materials, Containers & Packaging, Metals & Mining, Paper & Forest Products|
|Communication Services||Diversified Telecommunication Services, Wireless Telecommunication Services|
|Consumer Cyclical||Auto Components, Automobiles, Household Durables, Leisure Products, Textiles, Apparel & Luxury Goods, Hotels, Restaurants & Leisure, Diversified Consumer Services, Media, Distributors, Internet & Direct Marketing Retail, Multiline Retail, Specialty Retail|
|Consumer Defensive Sector||Food & Staples Retailing, Beverages, Food Products, Tobacco, Household Products, Personal Products|
|Energy||Energy Equipment & Services, Oil, Gas & Consumable Fuels|
|Financial Services||Banks, Thrifts & Mortgage Finance, Diversified Financial Services, Consumer Finance, Capital Markets, Mortgage Real Estate Investment Trusts (REITs), Insurance|
|Healthcare||Health Care Equipment & Supplies, Health Care Providers & Services, Health Care Technology, Biotechnology, Pharmaceuticals, Life Sciences Tools & Services|
|Industrial Sector||Aerospace & Defense, Building Products, Construction & Engineering, Electrical Equipment, Industrial Conglomerates, Machinery, Trading Companies & Distributors, Commercial Services & Supplies, Professional Services, Air Freight & Logistics, Airlines, Marine, Road & Rail, Transportation Infrastructure|
|Real Estate||Equity Real Estate Investment Trusts (REITs), Real Estate Management & Development|
|Technologies||Internet Software & Services, IT Services, Software, Communications Equipment, Technology Hardware, Storage & Peripherals, Electronic Equipment, Instruments & Components, Semiconductors & Semiconductor Equipment|
|Utilities||Electric Utilities, Gas Utilities, Multi-Utilities, Water Utilities, Independent Power and Renewable Electricity Producers|
Consumer Defensive Stocks
I find myself looking into 20 different consumer defensive stocks from the S&P 500 dividend achievers list. Of that list, 13 are S&P500 dividend aristocrats with 4 of them in the dividend king category. As a quick summary, here is what each of the classification means:
- Dividend Achiever: A stock that has increased its dividend for 10 consecutive years.
- Dividend Aristocrat: A stock that has increased its dividend for 25 consecutive years.
- Dividend King: A stock that has increased its dividend for 50 consecutive years.
As you probably know, a longer streak doesn’t mean a better stock. There are many more criteria that must be evaluated but what a long streak tells us is the commitment to shareholder value the company has and its ability to manage the company’s cash.
Consumer Defensive Stocks By Industry
Just by looking at the S&P500 Dividend Achievers and Dividend Aristocrats in the consumer defensive sector, we get a long list of stocks. In fact, we get 20 stocks and it’s a bit overwhelming to make a selection. To simplify the process, we can break it down by
To simplify the process, we can break it down by industry as a first step and pick the top consumer defensive stock from each industry or even eliminate industries if they don’t fit your portfolio strategy.
All stocks are grouped by sectors and industry to organize them for indexes and investors. It would make sense that not all stocks in a sector compete with each other so look for the competitors and find the best one.
Consumer Packaged Goods
This Consumer Packaged Goods industry has the most stocks representing the Consumer Defensive sector and it is also the industry where I already have a significant exposure. My holdings are in PG and KMB which I find to be enough for this industry. Over 6% of my portfolio is in those holdings already. I have held KMB for a really long time and it has been one of my best performers over time.
- Procter & Gamble NYSE:PG
- Colgate Palmolive NYSE:CL
- Kimberly-Clark NYSE:KMB
- General Mills NYSE:GIS
- Kellogg NYSE:K
- Clorox NYSE:CLX
- Hormel Foods NYSE:HRL
- McCormick & Company NYSE:MKC
- Church & Dwight Co. Inc. NYSE:CHD
- J M Smucker Co NYSE:SJM
I will admit that I favor household and hygiene products over the food products. The margin for food products is tight and there is a lot of competition as you can see in the list.
Retail – Defensive
There are 6 consumer defensive stocks in this industry and I don’t happen to have any. This is where my focus will probably be. All of you will recognize most of the companies in the list.
- Walmart NYSE:WMT
- Walgreens Boots Alliance NASDAQ:WBA
- Costco Wholesale NASDAQ:COST
- Target NYSE:TGT
- Sysco Corporation NYSE:SYY
- Kroger Co NYSE:KR
I can quickly eliminate Sysco and Kroger as their CAGR dividend growth for the past 10 years is below 10%.
Beverages – Non-Alcoholic
In the non-alcoholic beverages, we have two fierce competitors:
I currently hold Coca-Cola and assessing which of Pepsi or Coca-Cola should be in your portfolio will be for another day. I do not intend to add to KO for this round of investment, I would be interested in re-evaluating which one deserves a spot in my portfolio. So far KO has done well in my portfolio but I am not convinced it is the right stock. With that said, McDonald’s NYSE:MCD has done really well with new management. The non-healthy food business is not going out of business just yet.
Beverages – Alcoholic
I like this industry as people always like a good drink. Brown-Forman seems to have potential to meet my criteria but at the same time, alcohol is a discretionary spending after entertainment and I prefer to stay away from such market.
Regardless of the performance of Altria NYSE:MO, the tobacco industry is not really an investment I want in my portfolio.
Consumer Defensive Stocks – Short List
As you noticed, I eliminated 10 stocks since I am already exposed to the Consumer Packaged Goods and then 3 stocks were quickly eliminated from 2 industries (Beverages – Non-Alcoholic & Tobacco Products). I also eliminated the alcohol industry for now which leads me to the following short list.
I will be looking into each stock to make my final decision. The question of Amazon will probably come into play but it’s a long game for those businesses and technology can always change the competition. The choice will be between 3 dividend aristocrats and 1 dividend achiever. My selection should lead to a strong dividend growth stock.
Walgreens Boots Alliance, Inc.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.