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5 Best Consumer Staples Stocks to Buy Now for 2020 - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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Of the nearly 900 stocks in the consumer staples
sector, which are your best investment for
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dividends and protection from whatever the
stock market brings?
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I鈥檓 screening through all 900 companies
to reveal the five best consumer defensive
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stocks for your money.
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I鈥檒l not only walk you through how to find
these stocks but show you two ETFs you can
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use to get instant diversification.
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We鈥檙e talking consumer staples stocks today
on Let鈥檚 Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money.
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Hey Bowtie Nation, Joseph Hogue with the Let鈥檚
Talk Money channel.
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A special shout-out to all you in the nation,
thank you for spending a part of your day
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here.
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If you鈥檙e not part of the community yet,
just click that little red subscribe button.
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It鈥檚 free and you鈥檒l never miss an episode.
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Nation, I am loving our sector stocks series
and more than 40,000 of you have tuned in
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to see the best stock picks from each sector.
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We鈥檙e five videos into the series and this
could just be my favorite for investing over
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the next year.
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Now we鈥檝e talked about the state of the
economy in other videos, how this 10-year
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bull market is wobbling on the edge and the
factors I鈥檓 watching that could mean tough
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times for investors within the next year.
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But you can鈥檛 just sit out the market.
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Trying to time the next stock market crash
is like trying to drive over a bridge before
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it鈥檚 finished.
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Sometimes being too early is as bad as being
too late.
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Fortunately, consumer staples stocks are some
of the best long-term, high dividend stocks
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you can buy that will not only give you the
opportunity to stay in this market making
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money but also protect your portfolio if the
market crashes.
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If you look at the consumer staples fund,
in the green line here, against the broader
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market leading into the 2009 stock market
crash.
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Consumer staples stocks dropped less than
half of what we saw in the S&P 500 over the
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period.
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In this video, we鈥檒l start by showing you
why consumer staples stocks are able to benefit
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from a strong market as well as protect you
from a crash.
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I鈥檒l show you how as an equity analyst for
private wealth I used to pick these high yield
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stocks for clients.
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Then I鈥檓 going to reveal two consumer staples
funds ETFs and five of the best consumer staples
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stocks that should be on your radar for 2020.
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If you鈥檙e just joining us, we鈥檙e doing
11 videos to reveal the best stocks to buy
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in each sector of the economy.
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I鈥檓 looking at each sector from tech to
energy, consumer goods and utilities to show
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you how to find the best of breed companies
in each and create that diversified portfolio
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for growth and cash flow.
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This is hugely important because even though
I love those dividends in these defensive
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stocks, you have absolutely got to have investments
in those other sectors.
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It鈥檚 going to give you the diversification
you need to grow your portfolio no matter
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what the economy brings.
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If you鈥檙e coming in later to the series,
I鈥檒l link in the first comment below the
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video to the most recent video.
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I鈥檒l also be linking in the video description,
all the videos in the series so you can see
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all the stocks for each sector.
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Here we see the 11 sectors of the economy
and remember, each sector is made up of different
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industries that work in the same product or
service.
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And today we鈥檙e talking about all those
products you buy no matter what the economy
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does, the food, household and personal products,
the beverages and even maybe some of those
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adult beverages.
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We see that over the last five years, the
consumer staples sector has lagged the rest
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of the market pretty badly returning just
27% against that return of 51% on the S&P
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500.
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Over the last year the sector has only returned
6.8% versus an 11% gain on the market.
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In fact, only the energy and health care sector
have done worse for returns.
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But there鈥檚 good reason to believe the staples
might just turn this around in 2020 and why
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you need these in your portfolio.
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You see, because consumer staple stocks pay
out such huge dividends, they behave a lot
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like bonds when it comes to interest rate
changes in the economy.
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When interest rates decrease, investors start
looking for high yields in bonds and stocks
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in this sector and the prices go up.
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When rates increase, investors can get higher
yields in other investments so they abandon
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the staples and prices drop.
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That鈥檚 what happened to consumer staples
over the last few years.
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You see here a chart of the consumer staples
sector ETF and the S&P 500, pretty much tracking
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each other perfectly from 2009 to late 2015.
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Sure enough though, when the Fed started raising
rates in December 2015, the pain started for
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these dividend stocks.
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The market started outperforming and consumer
staples flatlined.
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But we鈥檙e seeing the opposite of this play
out right now with the Fed cutting interest
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rates three times since July 2019.
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Investors are again searching for those high
yield dividend plays and could come back to
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consumer staples in a big way.
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So before I highlight those two funds and
the five stock picks in the sector, I want
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to show you two factors you can use to find
stocks on your own.
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Everyone in the nation knows, I鈥檓 not about
to just lay down five stock picks because
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that does nothing for you.
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DO NOT just come on YouTube or tune into CNBC
to get stock picks.
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Understand how you find these and use that
power to have that control over your money.
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DO NOT give someone on TV control over your
investments.
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Now these two factors are above and beyond
the fundamentals we talked about in the first
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video in the series.
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I鈥檓 using trends in revenue, operating margin
and catalysts to pick stocks in the sector
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series but these next two are extra ones you
absolutely must be watching for when you pick
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consumer staples stocks.
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If you鈥檙e just joining us, make sure you
find that link in the video description and
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watch the first video to see how we鈥檙e picking
these stocks.
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But the first factor here for consumer staples
stocks is going to be the payout ratio.
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The payout ratio is the single most important
factor for making sure that dividend on the
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stock is going to keep paying out.
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This measure is the percentage of a company鈥檚
profits or net income is going to pay the
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dividend.
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The payout ratio is important for a couple
of reasons.
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First because a company stretching to pay
its dividend, pushing all the profits out
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the door to cover, probably isn鈥檛 going
to be able to pay that dividend for much longer.
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If a company is paying out 65% or 75% of its
profits to the dividend, it doesn鈥檛 take
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much of a hiccup in profits until they have
to cut the dividend.
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Also though, a company paying out much more
of its profits to investors probably isn鈥檛
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saving enough back for growth versus its competitors.
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That鈥檚 going to mean missed opportunities
and lost market share, and eventually falling
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profits.
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So what I鈥檓 doing when looking at consumer
staples stocks is comparing the payout ratio
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across companies.
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There鈥檚 no right or wrong answer here but
you鈥檙e trying to find companies that already
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offer a solid dividend but are maybe paying
less of their profits out for that dividend,
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so companies that can afford to increase the
dividend.
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Finding the payout ratio means just taking
the annual dividend amount per share and dividing
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by the earnings per share.
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The next factor here before we get to those
two funds and five stock picks is making sure
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these companies have a quality balance sheet.
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This one takes a little more digging but with
rock-bottom interest rates, companies have
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been on a buying binge for more than a decade.
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They鈥檝e been borrowing to buyback stock,
they鈥檝e been borrowing to make big expensive
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acquisitions.
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And it鈥檚 led to a mountain of massive debt.
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In fact, it was this massive debt that killed
Kraft Heinz after its 2015 IPO from private
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equity.
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One of Buffett鈥檚 top picks that year and
it鈥檚 now trading for less than half its
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price because that debt took away the financial
flexibility to stay competitive.
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What you want to look for here is going to
be measures like debt-to-equity and how much
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of earnings are going to make the interest
payments.
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Again, just like that payout ratio, it鈥檚
not so much the absolute level of debt or
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these measures but how they compare against
other companies.
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You want to be investing in companies with
relatively low measures of debt compared to
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their competitors.
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Now just like in the other videos, we鈥檙e
going to start off with a couple of consumer
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staples ETFs before we get to those five stock
picks.
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These funds are going to be a great way to
get that sector exposure if you can鈥檛 find
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individual stocks you like or maybe you just
want a little more diversification.
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Our first here is the Consumer Staples Select
Sector SPDR, ticker XLP, with a 2.6% dividend
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yield and an expense ratio of just 0.13% annually.
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The XLP holds shares in 33 companies in the
sector and based in the United States and
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has returned 12% annually over the last decade.
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You can see here it鈥檚 well diversified across
all the industries in the sector from beverages
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to food and household.
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For the other fund, I wanted to show you an
international option so we have here the iShares
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Global Consumer Staples ETF, ticker KXI.
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Like a lot of smaller funds, the expense ratio
is higher at 0.46% but the dividend is solid
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and this one is going to give you a broad
exposure to the global consumer.
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Half of the fund is invested in U.S. companies
but you鈥檝e also got exposure to Europe,
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Australia and Asia.
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Here you see that the KXI and that larger
XLP fund have tracked each other pretty closely
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but there is some opportunity here when the
two move out of step, maybe positioning into
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the cheaper shares for the bounce back.
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Now I want to reveal five consumer staples
stocks I found that should be on every investor鈥檚
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radar.
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I鈥檝e got some bellwethers here, those popular
brands everyone loves, as well as a few surprises.
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I鈥檝e ranked them here by dividend yield
so we鈥檒l be counting down to the highest
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dividend in the sector.
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PepsiCo, ticker PEP, is our first pick and
its 2.9% dividend puts it on the bottom of
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the list but the total return on shares makes
this a solid investment.
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Shares have produced an 11.5% annual return
over the last decade, above the 10% annual
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return on shares of Coke.
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And I gotta tell ya, I like the taste of Coca-Cola
better but the fundamentals for Pepsi go down
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a whole lot easier.
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Between the two, they control over 70% of
the non-alcoholic beverage market which give
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them both massive pricing and distribution
power.
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Pepsi鈥檚 annual sales are almost exactly
twice that of Coca-Cola though and it鈥檚
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payout ratio leaves a lot more room for growth.
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Pepsi pays out just 68% of its earnings to
cover the dividend versus Coca-Cola which
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needs 78% of its earnings to cover the dividend.
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Shares of Pepsi don鈥檛 come cheap, something
you鈥檒l see in any stock in the sector, trading
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for a price of 24-times earnings.
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Profits are expected about 4% higher over
the next year though I would put them closer
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to six percent higher given management鈥檚
history of beating expectations.
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We see a broad band of price targets for the
11 analysts covering Pepsi with a low target
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of $115 and a high target of $155 per share.
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Despite the lackluster targets, this is one
you can put in your portfolio and forget about
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and you鈥檒l always know it鈥檚 going to produce.
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Next here is Kimberly-Clark, ticker KMB, the
$45 billion personal care products giant paying
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a 3.1% dividend yield.
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What I鈥檝e tried to do here as we鈥檝e seen
in those other videos in the series is to
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pick some of the best stocks across the different
industries in the sector.
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So here with KMB you鈥檝e got personal care
products, we had beverages and snacks with
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Pepsi and we鈥檒l see some of the other industries
in our next picks.
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What I really like about Kimberly-Clark though,
besides the fact it鈥檚 only paying about
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61% of its profits to cover the dividend which
leaves a lot of room for growth, what I love
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here is that the company has been reinvesting
an average of $5 billion annually over the
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last five years into product development and
marketing.
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You don鈥檛 see that level of reinvestment
at its competitors so what I think could happen
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in the coming years is that KMB reaps those
benefits with faster revenue growth and cash
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flow.
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Shares trade for 19.6-times earnings which
are expected 5.8% higher over the next year
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but I think those surprise revenues start
to play out.
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Analysts have a low target of $123 per share
to a high target of $155 each for the stock
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over the next year and I like it at least
up to that $150 per share for a long-term
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bet.
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Now this next one is going to be one of the
big surprises here, Kraft Heinz, ticker KHC
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and its 4.9% dividend yield.
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I鈥檝e warned investors against Kraft Heinz
since starting this channel and yes, even
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used it as the poster child for a bad balance
sheet earlier in this video.
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But I鈥檓 calling it.
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Shares are down almost 60% since the 2015
listing and there鈥檚 a lot to like about
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the stock going forward.
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Kraft cut its dividend late last year which
absolutely destroyed the shares but now it鈥檚
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paying just 54% of earnings to cover the payout.
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That鈥檚 supporting cash flow, helping it
to pay down some of that debt and stay competitive
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in the market.
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The company has $2.3 billion in balance sheet
cash, is the third largest food and beverage
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manufacturer in North America鈥nd let鈥檚
not forget that Buffett鈥檚 Berkshire Hathaway
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still owns almost $11 billion in shares, that鈥檚
more than 25% of the company and you better
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believe he鈥檚 pushing for profits.
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Shares of Kraft trade for just 11.2-times
earnings, making it one of the cheapest consumer
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staples stocks you鈥檒l find.
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Earnings are expected to be down 13% over
the next year but margin gains reported last
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quarter make me think they can beat this number.
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This is a stock that analysts have all but
given up on with a low target of $23 a share
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and a high of just $34 each, right around
where it鈥檚 trading now.
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I don鈥檛 want you to think this is going
to be a magical ride higher.
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Investor sentiment is still negative on the
stock but there鈥檚 a lot of value here for
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investors willing to take a shot and hold
for the long-term.
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Big Lots, ticker BIG, is another risky one
but paying a solid 5.6% dividend here and
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some good fundamentals.
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Big Lots is kind of iffy here.
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It鈥檚 technically in the retail sector but
sells so much in that consumer staples segment
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that I included it here.
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And honestly, shares have been slammed for
the better part of two years, down 65% since
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January 2018, but starting to show signs of
a turnaround.
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Sales and cash flow have recently improved
and the company is in that discount space
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of retail so is more protected against the
death-by-Amazon that we see in other retail
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stores.
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Shares are trading for just 5.4-times earnings.
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Even with the 5.8% drop in earnings expected
over the next year, Big Lots is just 5.7-times
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earnings.
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This company is paying just 30% of its profits
out to support that 5.6% dividend yield.
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This is a small company, just $840 million
in market cap and is trading cheap on just
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about every metric.
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Analysts have a low target around $25 and
a high of $32 per share which is 48% over
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the current price.
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Now like Kraft Heinz, this one could still
be volatile and might take a year to realize
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that turnaround so you might consider using
the covered call strategy we talked about
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recently.
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That鈥檚 an options strategy I use to produce
immediate cash return and get near-term protection
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on some of my stocks.
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I鈥檒l leave a link to that video in the description
below so make sure you check that out.
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Our cash flow machine here is Altria Group,
ticker MO, with a 7.2% dividend yield.
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Shares of Altria have been under pressure
for the last couple of years on disappointment
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over its e-cigarette acquisition Juul but
the assets have been written down and it could
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be ready to trade on a more stable footing.
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After the 2008 split, Altria is solely focused
on the U.S. cigarette and smokeless market
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which means it鈥檚 much less at risk to the
volatile international market.
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While tobacco use is in decline in the U.S.,
it鈥檚 a very slow rate less than a few percent
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a year and pricing power keeps sales fairly
stable.
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One catalyst for the shares, besides the valuation
which we鈥檒l get to, is its 10% ownership
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of Anheuser-Busch which gives it a little
growth into that global beverages market.
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Shares trade for 11.3-times earnings which
are expected higher by almost 5.8% over the
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next year.
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This one has fallen well past the point of
value and has traded consistently around 13-times
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earnings which could put it at $57 a share
over the next year.
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In fact, analysts have the shares around $44
on the low end and up to $68 per share at
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the high end.
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Click on the video to the right for the five
oil stocks that should be on every investor鈥檚
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radar in 2020.
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Dividend yields as high as 10% and upside
price appreciation.
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Don鈥檛 forget to join the Let鈥檚 Talk Money
community by tapping that subscribe button
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and clicking the bell notification.
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