Why Consumer Staples?

Generally, when I look for dividend shares, I look for well-established companies that have strong fundamentals in a defensive sector. One defensive sector is consumer staples.

When a recession hits, the first action many people take is to cut their spending. This affects all businesses, but there are some expenses that are harder to cut than others. Consumer discretionary spending is relatively simple to cut, for example holding out on buying a new car or purchasing new clothes. In contrast, consumer staples are, well, staples.

Staples are the sort of products that you need, regardless of a recession, and it can be difficult to reduce spending in this category by any material amount. That’s why businesses in the consumer staples industry are often sought after in the lead up to, or during, a recession. These businesses produce essential products, for example food and household items.

That’s why businesses in the consumer staples industry are often sought after for stability, particularly for dividends. So, without further ado, here are three ASX consumer staples shares for dividends that you may not have considered.

1. Metcash

Metcash is a leading wholesale distributor of supermarket products and the owner of popular retail brands like IGAMitre 10 and Foodland. In the liquor industry, it owns The Bottle-OCellarbrations and Duncan’s.

Metcash has experienced a relatively volatile year but its share price is up more than 23% year-to-date. Unlike the other two companies on this list, Metcash pays fully franked dividends. Dividends were cut in 2017, but they then almost tripled in 2018 and were increased again in 2019.

Right now, Metcash shares offer a trailing dividend yield of 4.7% or a grossed-up (i.e. with franking credits) dividend yield of 6.7%.

The Rask Finance video below explains franking credits:

2. Coca-Cola Amatil

Coca-Cola Amatil is the Australian distributor and rights holder to the famous Coca-Cola brand, which is owned by the US parent company Coca-Cola Co (NYSE: KO). Coca-Cola Amatil started life in 1904 as the British Tobacco Company. The ‘Amatil’ in its name came in 1977 when it was renamed as Allied Manufacturing and Trade Industries Limited (AMATIL).

Another company in the consumer staples sector, Coca-Cola Amatil shares are up around 25% year-to-date with modest growth in its half-year report. While Coca-Cola Amatil dividends are unfranked, they have been consistently increasing for the last few years from $0.42 in 2015 to $0.51 in 2019. Coca-Cola Amatil are currently trading on a trailing dividend yield of ~%5.

3. Tassal Group

Tassal is a Tasmanian-based salmon farming company that was founded in 1986 and listed on the ASX in 2003. Tassal’s operations include hatching, farming, processing, sales and marketing of Atlantic salmon. The company operates under four different brands, these being TassalTasmanian Smokehouse, Superior Gold and De Cost Seafoods.

The Tassal share price has been under fire this year, down roughly 6% year-to-date. However, last week, Tassal announced it had received a major approval for an expansion of one its facilities, sending the share price nearly 3% higher on the day.

Tassal shares currently trade on a historical price-earnings (P/E) ratio of only 12.6 times and offer a trailing dividend yield of 4.3%, partially franked at 25%.

What Now?

These companies may not be the top picks for large or reliable dividends, but each has its own merits and advantages over one of the big banks or an ASX real estate investment trust (A-REIT).

Although I wouldn’t hold any of these companies as a large position in my portfolio, they could be worth considering for a small exposure.

If you’re interested in getting tactical exposure to the consumer staples sector but aren’t sure which company to invest in, you could consider the iShares Global Consumer Staples ETF (ASX: IXI). I’ve written about this ETF in a previous article here.

Or, if exposure to consumer staples isn’t what you’re after, you may be more interested in our number one ETF pick profiled in the free report below.

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Disclosure: At the time of writing, Max has no financial interest in any of the companies mentioned.