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US Consumers Drive More Dividend Income

August 29, 2019

The United States is a nation of consumers. We spend and spend and then spend some more. And even with some arguing that consumers want less stuff and more experiences, that’s still money being spent.

The US economy continues to be all the better for it, and it’s showing up in the most recent US gross domestic product (GDP) data released this morning.

Overall the US GDP is being reported at 2.00%, revised a tick lower from the last reading of 2.10%. So far this year, GDP is running at 2.30%, while compiled economist estimates for the full year done by Bloomberg show expectations for full year 2019 GDP at 2.50%.

But it’s the underlying components of GDP that are more interesting. Net exports contributed a negative 0.60%. Residential property investment provided another negative 0.10%. Neither is surprising, as trade has suffered, particularly in the agricultural sector. Property development continues to be hindered locally by a raft of zoning and regulatory hurdles in major markets.

Government got bigger and added 0.40% to the GDP for the quarter. But the two really important contributors to US GDP were business non-residential fixed investment—at a positive 0.40%and consumer consumptionat a whopping 1.80%.

Business fixed investment is what I’ve been pointing out over the many recent months inside my Profitable Investing advisory. This shows the confidence of companies in the economy and consumers, which has been justifying major fixed investment.

In turn, that investment begets more revenue and profits over time for companies. So, no surprise then that the additional data inside the GDP reading showed that corporate profits were up big for the quarterrising by 5.30% and significantly better than in the fourth quarter of 2018 and the first quarter of 2019.

But let me draw your attention to consumers with that big add to GDP. US personal consumption was up 4.70% for the quarter, which is the best quarterly growth in spending since the fourth quarter of 2014.

US Personal Consumption (GDP)—Source: Bureau of Economic Analysis and Bloomberg Finance, L.P.

Consumers are armed with rising wages that haven’t expanded at the current pace of 3.2% for a very long time. That’s double the rate of US inflation, as measured by the core Personal Consumption Expenditure Index (PCE).

And consumers remain very comfortable in their view of the economy, their own personal finance condition and their willingness to keep spending. This is evidenced by the Bloomberg Consumer Comfort Index, which just posted another gain for the week to a level of 62.50. That’s 51.33% higher than it was in late 2016.

Consumers Build Better Dividend Performers

Consumers are indeed spending more. And this means that one of the more traditional, defensive market segments should continue to benefit—the consumer staples market. This is because traditionally, during good and bad economic times, consumers and households continue to spend on the necessities of life. In good times, they spend even more, which is what we’re seeing in the current US economy.

Consumer staples have always been considered all-weather stocks because, even during challenging times, they still see revenues flowing. That concept got severely challenged in 2018 as many traditional leaders in this market ran into a buzzsaw of changing consumer tastes for packaged and branded goods, while costs including transportation rose and squeezed margins.

But while many have taken up the challenge to focus on the right products and brands along with cost controls, others have dragged their feet, and the market has punished them. That said, the segment has many successful turnarounds, including Mondelez International (MDLZ), with its yield of 1.91%, Procter & Gamble (PG), with its yield of 2.46%, Colgate-Palmolive (CL), with its yield of 2.34% and even General Mills (GIS), with its yield of 3.78%.

All of these consumer stocks have been very good performers year to date and are continuing the longer-term trend for the segment. The market segment overall has generated a return over the past five years of 54.29%, as tracked by the S&P 500 Consumer Staples Index, for an average annual equivalent return of 9.06%.

S&P 500 Consumer Staples Total Return—Source: Bloomberg Finance, L.P.

Beyond the great collection of dividend-paying stocks noted above, there is also an easy, packaged way to synthetically invest in consumer goods for growth and dividend income.

Vanguard has a well-run ETF in this segment—the Vanguard Consumer Staples ETF (VDC). It has largely kept up with the Index, while paying a dividend yielding 2.68%. And for the year to date, the ETF has generated a return of 19.61% versus the 16.89% gain for the S&P 500 Index. And as is true for the utility stocks, most consumer goods stocks are tax-advantaged with qualified dividends.

Strong and comfortable consumers in the US means more spending. And consumer stocks should continue to benefit from this trend, while providing growth and more dividend income for investors like us.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing

PS—Now that I’ve shown you why you need to get in on the action in consumer stocks, be sure to check out my Profitable Investing advisory for more of my market research and recommendations for further, safer growth and bigger, more reliable income.