Investing in top Canadian consumer staples stocks can help increase the defensive characteristics of a diversified portfolio. Here’s how to spot the best of them.

One of the five main economic sectors for investing is the consumer sector. American companies like Proctor & Gamble, Kraft Heinz Co. and the spice company McCormick and Co. are all in the Consumer sector.

Meanwhile, Canadian consumer staples stocks include Saputo and Maple Leaf Foods.

Canadian consumer staples stocks are apt to fall in the middle range of risk among the five sectors, between the more volatile resources and manufacturing companies and the more stable Canadian finance and utilities companies.

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Consumer spending is a key part of an economy. Slowing consumer spending can be a sign that investors are holding on to their money because of economic uncertainty, or other world and financial events.

Canadian consumer staples stocks can help shield your portfolio from downturns

Canadian consumer staples 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.

Here’s what to look for in top-performing Canadian consumer staples stocks—including a record of dividends

It’s essential to invest in mostly 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.

The spike in commodity prices in the early part of the last decade pushed many consumer-product companies to deeply cut their costs. That ended up letting them boost their profits. It has also freed up cash for expanding and upgrading their operations, or for increasing their dividends.

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.

Use these key factors to find successful Canadian consumer staples stocks

• Freedom from business cycles: Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify and include consumer stocks as well as utility and finance stocks.
• Ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Rising environmentalism and socially conscious investing are just two examples of secular trends.
• Ownership of strong brand names and an impeccable reputation: Customers keep coming back to these businesses, and will try their new products.

When investing in stocks—including Canadian consumer staples stocks—we recommend using our three-part Successful Investor philosophy:

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

What consumer staples do you feel are a must-have investment?

Do you keep consumer staples in your portfolio? How do they perform for you?