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Consumer Stock Carnage — How You Can Beat It

Dividend investors are getting very nervous, at least judging by the questions that have been rolling into my inbox.

But in case you haven’t noticed already, one sector of the stock market in particular has really gotten crushed lately: consumer staples.

It’s no secret that investors have flocked into dividend stocks over the last few years. Bond yields were hovering near zero. Now that’s beginning to change. As I reported in yesterday’s Wealth Watch, the 10-year Treasury yield just broke above 3% for the first time in over four years.

Higher interest rates on bonds today makes some dividend-paying stocks a bit less attractive, plain and simple.

But not all dividend-paying stocks are created equal. Some are at a big disadvantage and in this environment should be avoided for now.

Hence the carnage in consumer staples, which seems odd at a time like this. Typically these are the types of defensive stocks that investors flock to when market volatility rises.

They tend to ride out stock market turbulence better than the more cyclical sectors, like energy or tech, for example.

But not this time. The S&P 500 Consumer Staples Index is down nearly 15% since January’s high.

XLP

Source: StockCharts.com

Take a look at the list of stocks notching new 52-week lows… It’s littered with consumer staple stocks, many of them household names, like Hershey (NYSE: HSY), Procter & Gamble (NYSE: PG) and Philip Morris International (NYSE: PM).

By contrast, the S&P 500 is down only 8% from January’s high. And several of the more volatile cyclical sectors are crushing it on the upside.

Energy, for instance, one of my favorite sectors right now, is up over 10% in the past month alone. Propelled by stellar earnings reports.

Therein lies the lesson for dividend investors. You’ve got to think outside the box and be opportunistic with the stocks you choose for income.

Then why are defensive dividend-paying consumer stocks getting crushed you ask?

Think about the environment we’re in.

Investors are nervous as long-tailed cats in a room full of rockers. Interest rates are rising due to fears of inflation. That means higher raw material costs and higher labor costs.

It’s a double-whammy for consumer names like PG and HSY.

Think about it. The chemicals that go into a box of Tide detergent and the sweet stuff that goes into making Hershey’s Kisses are all going up in price.

Additionally, wages and salaries for the folks who make and ship Tide and Hershey’s Kisses are also rising.

That’s squeezing profit margins at PG, HSY and many other consumer stocks. All at a time when organic growth is difficult to come by.

At a time like this, it’s better to focus on commodity producers… the companies that benefit from higher raw materials prices.

Case in point: energy.

Crude’s flirting with $70 a barrel, up from $50 at this time last year, and energy stocks are benefiting big-time.

They’re beating earnings estimates and raising dividends.

That’s a recipe for success in today’s market environment for investors seeking steady income.

Here’s to growing your wealth,

Mike Burnick

Mike Burnick
Chief Income Expert, Mike Burnick’s Wealth Watch

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Mike Burnick

Mike Burnick is the editor of Mike Burnick’s Wealth Watch, Infinite Income, Amplified Income and Millionaire Moments. Mike has been bringing his trading strategies to the masses for over 30 years. He has been with Seven Figure Publishing since 2017. In 2018, the average return of Infinite Income beat the...

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