A friend from Sandestin recently asked Margaret McDowell, ChFC®, AIF®, of Arbor Wealth Management why the firm favors a consumer staples and utilities strategy for their clients. Ms. McDowell responded with a few queries of her own.

“Did you buy a new car this year?” 

“No,” my friend replied, “I drive a 2009 that’s in great shape.”

“Did you purchase a new refrigerator this year?” 

“No, I haven’t bought a new fridge in a while.”

“Okay,” I said, “now did you purchase food, gas, paper towels or toothpaste this year? And did you pay an electric bill this year?”

We laughed and she said “Of course.” 

“So did most other folks,” I said.  “Big ticket items come and go, but repeatable consumer staples are goods that folks simply will not do without. New moms are going to buy diapers, and when getting ready for a family barbecue, you’re going to buy ketchup. We all have to buy gas and food,” I continued. “So we seek investment opportunities in companies that produce these types of consumable commodities, or what are called consumer staples.”

“Why did you ask if I paid my electric bill last summer?” my friend asked.

“Well, not many people will go without air conditioning. If you know our Southern climate in August, you’d probably agree that air conditioning is vital in the minds of most residents. So utility companies provide a consumable service that is virtually indispensable and ultimately, one that that folks simply cannot do without.  Thus, we like to invest in utilities.”

“That makes sense,” said my friend.  “Do these consumer staple and utility companies have to pay dividends for you to choose them for your clients?”

“Yes, our investment strategy almost exclusively includes dividend payers,” I replied. “We want our clients to get paid on a periodic, systematic basis through their stock dividends and bond coupons.  So regardless of whether the market rises or slumps or simply goes sideways, they are receiving a tangible reward for being invested.”

“Now, naturally we prefer companies that have a track record of share appreciation or growth as well, as we seek a positive total return for our clients. But a majority of our clients, who are retired or nearing retirement, aren’t looking to hit a home run. They are more comfortable with safer gains. With big gains sometimes come big risks.”

“We favor companies that have historically increased their dividend payouts,” I said.

“So it’s possible to get paid from your investments without depleting your principal?” she asked.

“Oh yes,” I said. “We endeavor to continue growing your principal. But meanwhile, regardless of short-term market fluctuations, our clients are getting paid. We can link the dividends to a checking or savings account and have them arrive each month on a designated day.  It’s basically a replicated paycheck.”

“What happens when the country hits an economic skid?” she inquired.

“Good question,” I said. “We look for U.S. companies that have broad global appeal and who are successful at marketing to highly populated emerging market countries. The U.S. is certainly a huge market for consumer staple items, but in countries throughout the world, more and more people are achieving middle class status, and can now afford to purchase consumer staple goods.”