The 3 Best Stocks to Invest in Household Products

By Markets Fool.com

Investing in companies that sell household products can be a smart plan for new investors because they often have straightforward and easy to understand business plans. However, not all consumer goods companies are created equal. To help you sort the winners from the losers, I've outlined below three of the best household products stocks to own today.

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A dividend aristocrat
Not only does Procter & Gamble hold a rich portfolio of billion dollar brands, but it is also a reliable dividend paying stock. Procter & Gamble is a dividend aristocrat because it has raised its dividend payout every year for at least 25 years without fail. The consumer goods conglomerate has in fact paid a dividend for the last 125 years straight, and increased that dividend for the past 58 consecutive years. This is important because it proves the company is committed to rewarding shareholders.

Moreover, at its current stock price of around $83 per share, Procter & Gamble sports a dividend yield just north of 3%. While that isn't the sort of sky-high yield often favored by income investors, it is markedly above the S&P 500's average yield of just 1.97% today. Moreover, the company's ability to generate loads of cash flow coupled with its reliable payout ratio of 74% mean P&G should be able to comfortably reward shareholders for many more years to come.

Procter & Gamble owned Tide. Source: The Motley Fool.

You don't have to be a product person to appreciate P&G's rich collection of top household names including 23 brands that each generate between $1 billion-$10 billion in annual salesfor the company. Procter & Gamble now sells products in more than 180 countries around the world. The household goods giant is in the process of selling some of its underperforming brands and aggressively cutting costs. Yet, these moves should only bolster Procter & Gamble's position as a leading household products stock as it streamlines the business.

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A wide economic moat
Colgate-Palmolive Company
is the next stock to make this list of top consumer products companies thanks to its impressive economic moat. The company's competitive edge starts with the size and scale of its worldwide operations today. Colgate-Palmolive's products, which include its namesake toothpastes as well as deodorants, shampoos, and shaving goods, are currently sold in more than 200 countries. This affords the company economies of scale, which in turn helps lower Colgate's costs.

On top of this, the company's Colgate brand dominates the global oral care space today as it commands nearly 45% market share in toothpaste, according to data from Morningstar. For investors that want to conquer the toothpaste market it's as easy as owning both Colgate-Palmolive and Procter & Gamble, which makes Colgate's biggest rival, Crest toothpaste. Yet, as I mentioned above, there are plenty of other reasons to own shares of P&G as well.

Similar to Procter & Gamble, Colgate-Palmolive boasts a rich history of rewarding shareholders through dividends and buybacks. The namesake company has been in business for nearly 200 years, and has paid a dividend every year since 1895. Still not impressed? Colgate has increased its annual payout for the past 52 years running.

With its shares trading around $69 apiece today, the stock has a modest dividend yield of 2.18%. Nonetheless, Colgate-Palmolive's reliable payout ratio of 59% means the company should have no problem continuing to increase its dividend in the years ahead. Additionally, Colgate's board recently announced a 6% dividend hike to $1.52 per share annually, as well as a $5 billion share repurchase plan -- both are a win for shareholders.

Branding power
Commanding a portfolio of recognizable brands is critical for companies in the household products market. Just ask Clorox Co . As much as 80% of Clorox's brands represent the number one or two spots in their respective business units today, which help it offset rising commodity costs. This also lends Clorox pricing power or the ability to raise prices without a significant backlash from consumers.

Moreover, the consumer products giant has successfully raised prices 64 times since 2005. Clorox has been able to generate strong free cash flow as a result. In fact, over the past decade Clorox has produced 13% free cash flow as a percentage of sales. In fiscal 2014, the company generated FCF of $633 million, an increase of roughly $50 million from the prior year.

Clorox also gets high marks for its ongoing cost-cutting efforts. Since 2003, Clorox has delivered more than $100 million in annual savings. This has served the company well considering it boasts margins of more than 17%. Despite its strong portfolio of leading brands such as its namesake products, Burt's Bees, and Glad, Clorox isn't resting on its laurels. Rather, management understands the importance of product innovation. That's why Clorox spends as much as $600 million per year on research and development.

These things help make Clorox one of the best stocks in the household products category today. However, the stock is currently trading near all-time highs just north of $110 per share. Moreover, the stock looks expensive now with a price-to-earnings growth rate of more than 4, which is above the industry average. Therefore, patient investors may want to wait for a pullback in shares of Clorox before jumping in.

Boring and reliable wins the race
Sure, these consumer goods stocks may not be as exciting as other high profile names on the market today. However, they offer investors low risk and worthwhile returns in an otherwise fickle market. Not to mention, they're stocks that you can buy and hold for many years to come.

The article The 3 Best Stocks to Invest in Household Products originally appeared on Fool.com.

Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.