It pays to be a contrarian.
Three months ago, no one wanted to own a group of stocks called consumer staples. These are the safe, dividend-spewing, cash-rich companies that sell everything from soap to soup.
Investors were selling these stocks hand-over-fist. In the first five months of the year, they were nearly all down by double digits.
As I noted on May 8, investors had a great many excuses.
Or my all-time favorite, the fear of a “paradigm shift” where, for some reason, people aren’t going to buy food and detergent anymore.
Buying over-owned, overvalued tech stocks was a lot more exciting.
To me, that sounded like a fantastic buying opportunity. Buy the Consumer Staples Select Sector SPDR ETF (NYSE: XLP), I said.
And now? The exchange-traded fund (ETF) is up nearly 12% just three months later.
How did I know? It’s all about dividend yields.
Consumer Staples Sector and Wealth Protection
Most consumer staples companies pay a dividend.
Of course, the cheaper the stock gets, the higher the dividend payout is as a percentage of the stock price.
And by last May they were getting to be quite large. You could see that in the dividend paid by the Consumer Staples ETF.
As I noted in my original article, anytime you bought this ETF when its dividend yield hit 2.75% or better in the last decade, you were rewarded with stock gains of between 9% and 28%.
And it’s worked out that way yet again. The ETF’s dividend yield topped out at nearly 3% before investors rediscovered the sector and bid the stock higher.
But what about now? Sell? Or hold?
I say keep holding the ETF.
And once again, I’ll point to the dividend yield to show you why.
Consumer Staples Are Perfect for Defensive-Minded Investors
As you can see from the chart’s red line (the dividend yield), it’s trending down since May as the stock prices of the companies that make up this sector head higher.
Over the past decade, each time the sector went from undervalued to ostensibly overvalued, the dividend yield has trended down to as low as 2.25%.
Right now the ETF is paying an annualized dividend of about $1.58 a share. By that measure, the price of the ETF would need to hit $68 to $69 a share for the dividend to hit an equivalent yield of roughly 2.25%.
That might seem extreme. But the consumer staples sector is, in many ways, ideally positioned.
If the broader market heads to new record highs from here, the sector will no doubt continue to draw defensive-minded investors.
If the market weakens and heads lower, the consumer staples companies will likely draw even larger flows of investor cash seeking safety in the storm.
Jeff L. Yastine
Editor, Total Wealth Insider