Investing in top consumer product stocks can help your portfolio in an economic downturn, especially if they pay sustainable dividends

At the Successful Investor, we think most investor portfolios should hold mostly high-quality blue chip stocks—and among those stocks, top consumer-product companies can provide stability during a recession or economic slowdown.

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Consumer product stocks can help protect your portfolio from downturns

Consumer stocks benefit from continuous, habitual use and have a steady core of sales, regardless of the economy and business cycles. Typically, consumer-products companies sell staples, like soap, soup and beverages. These are items that consumers typically must buy no matter what the economy is doing.

As a result, the consumer sector can provide some protection against economic downturns. That’s a key difference between Consumer stocks and companies in the Manufacturing & Industry or Resource sectors, which are far more sensitive to the ups and downs of the economic cycle.

Find top-performing consumer product stocks to add to your portfolio

It’s essential to invest in stocks that have some history of rising sales, if not profits. Blue chip stock issuers are generally well-established, dividend-paying corporations with strong business prospects. These are companies that also have strong management that will tend to make the right moves to compete in a changing marketplace.

Strong consumer-products companies share a number of characteristics. These include geographic diversity to protect them from regional economic difficulties, a record of rising cash flow and strong balance sheets. All these are characteristics of blue chip consumer stocks.

Meanwhile, we believe that a record of increasing dividend payments is a good indication of a strong blue-chip company, especially in a slow economy. High-quality blue chip stocks will usually be in a position to remain profitable during almost any type of economic hardship or recession. Plus, you get paid blue chip dividends and earn income while you hold these stocks even if share prices are falling.

Focus on these three safety factors to help you select high-quality consumer product stocks

1. Freedom to serve (all) shareholders. High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.
2. Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.
3. Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

Think like a portfolio manager and avoid “big ideas” to find the top consumer product stocks to buy

As part of their stock market research, portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build their client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

Furthermore, many investors instinctively try to spot big ideas. Most instead get sidetracked by ideas that are eye-catching but transitory. Rather than give you a clue to the market’s direction, these transitory ideas may distract you from what’s really going on. For example, when markets rise for a long time, some investors lose the habit of trying to spot the big ideas that are driving the rise. Instead they switch to searching for what you might call “The One Big Signal” that tells you it’s time to sell. You’re especially prone to falling into this trap if you’ve stayed out of the market during a long rise in prices.

Use our three-part Successful Investor approach for the best results while buying stocks—including consumer product shares

1. Invest mainly in well-established, dividend-paying companies.
2. Avoid or downplay stocks in the broker/media limelight.
3. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). This helps you avoid excess exposure to any one segment of the market that is headed for trouble.

Does controversy behind a consumer product company cause you to reconsider the investment, or do you think controversy of a brand is good for investors? Please share your thoughts.

With consumer product stocks in a relatively stable economic sector, do you think it’s as important to look for blue chip companies? Why or why not?