Dividend Stock Purchasing: The Different Kinds of Consumer Goods Companies
Consumer goods companies are a sometimes-overlooked option for purchasing dividend stocks. Any company that manufactures or distributes products that people use falls into the consumer goods sector of the economy, but this category includes two subcategories: consumer cyclicals and consumer staples.
Consumer cyclicals owe their name to the fact that demand for these products waxes and wanes, typically in lock step with the economy. Products in this category fall into two categories: durable and nondurable goods.
Durable goods are physical goods that should last for years, such as cars, electronics, hardware, and appliances.
Nondurable goods represent services and less-tangible items, such as anything related to entertainment or travel, including movies, concerts, air travel, hotels, and restaurants.
The share prices of cyclical stocks correlate to the movement of the business cycle and consumer sentiment regarding the economy. During a boom, these companies see strong sales and profits as retail and leisure spending increases.
Consumer staples are noncyclical — no matter what part of the business cycle the market is in, demand for these products doesn’t slow down. Consumer staples have a low correlation to the gyrations of the stock market because people need to buy these items to carry on their everyday lives.
Most consumer staples fall under the heading of consumables, also referred to as consumer-packaged goods (CPG). These packaged products get consumed quickly and need to be replaced on a steady schedule.
With a steady demand for their products in good times and bad and a lot of competition, companies in the consumer staples industry have a difficult time increasing profits and dividend payments through rising demand or increasing prices. For foods and beverages, taste is a great way to stand out from rivals, but what about soap and shampoo? Here the companies rely on branding, advertising, marketing and good-old cost- and price-cutting to attract attention to their products.
Branding is a strategy companies use to create differences between products that are very similar in quality. Strictly speaking, brand is the name and packaging of the product. But the concept of brand is essentially a feeling about the qualities the consumer associates with the product.
One way to boost profits and lift share prices is to reduce the cost of business, especially with the materials needed to make the products. Most of the materials to create consumer goods are commodities — wherever you buy them, the quality is pretty much the same. Companies can reduce their costs of materials by switching suppliers, merging with or buying suppliers, buying larger quantities for discounts, and leveraging the economies of scale (the spreading of fixed costs over a large group) that come from good management.
When looking at consumer staples, make sure their pricing is stable or growing. You don’t want a company that may have to lower prices to keep up with the competition or raise prices because of rising material costs; both situations cut into profit margins. However, don’t write off a price cut right away. Because the products a staple sells are very similar to its rival, one company may lower prices as a way to boost profits and expand market share by grabbing new customers.