Income investors looking for high-quality dividend growth stocks should take a closer look at the consumer staples sector.

Of all market sectors, consumer staples hold the highest number of Dividend Aristocrats, a select group of 53 stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases.

Of the 53 Dividend Aristocrats, 13 come from the consumer staples sector. Consumer staples are household essentials—products that people can’t (or won’t) do without, even when the economy enters a recession. Think food, beverages, tobacco, and household products.

These are typically stable businesses that sell products people consume on a daily basis, which gives them pricing power, and the ability to withstand recessions. Each stock mentioned in this article is on our list of 350 consumer staples stocks that pay dividends to shareholders.

The rankings in this article are derived from our expected total return estimates for every consumer staples dividend stock found in the Sure Analysis Research Database. This article will discuss the top 7 consumer staples dividend stocks in our research database, each of which we expect to generate annual returns of at least 10%+ per year.

No. 7: J.M. Smucker (SJM)

Expected Annual Returns: 11%

J.M. Smucker is a large food and beverage company. Its biggest brands include Smucker’s, Folgers, Jif, Crisco, Pillsbury, Hungry Jack, Café Bustelo, and Bick’s. It also has pet food brands including Meow Mix, Milk-Bone, Kibbles ‘n Bits, and 9Lives.

The company has four leading brands which each hold the #1 market share position.

 

Source: 2018 CAGNY Presentation, page 11

The operating climate has become somewhat volatile for Smucker. In fiscal 2017, total sales fell 5%, while diluted earnings-per-share declined 11% for the year. The culprits were the company’s coffee and pet foods businesses in the U.S., which reported operating profit declines of 14% and 15% last year, respectively. Rising marketing and raw materials costs weighed on profitability in 2017.

Fortunately, conditions have improved so far in fiscal 2018. The company reported fiscal third-quarter earnings on 2/16/18, and beat analyst expectations for both revenue and earnings-per-share. Net sales increased 1% for the quarter, while adjusted earnings-per-share increased 25%, thanks largely to tax reform.

Despite the current challenges, we believe Smucker’s long-term growth potential is still intact, thanks to its strong brands. It also has exposure to growth categories, such as pet food.

 

Source: 2018 CAGNY Presentation, page 17

According to Smucker, the pet food industry is growing at a 4% annual rate. Smucker is well-positioned to capitalize on this growth, with its top pet food brands. And, the company is expanding even further into pet food with the recent $1.7 billion acquisition of Ainsworth Pet Nutrition. Approximately two-thirds of Ainsworth’s annual sales are derived from its Rachael Ray Nutrish brand, which gives Smucker exposure to the premium pet food category.

For fiscal 2018, Smucker expects flat sales, but adjusted earnings-per-share are expected to rise 6%-8% thanks to cost cuts and share repurchases. Our long-term earnings growth estimate for Smucker is 5%-6%. Continued earnings growth allows the company to raise its dividend. Smucker has increased its dividend for 16 years in a row, and the stock has a current yield of 2.8%.

In addition, we have a fair value price estimate for Smucker shares at $135. With the share price currently at $111, we believe a rising valuation could add 3%-4% to annual returns. The combination of an expanding valuation, earnings growth, and dividends, could result in 11% annual returns for the stock.

No. 6: Church & Dwight (CHD)

Expected Annual Returns: 12%

Church & Dwight manufactures personal care and household products. Its major brands include Arm & Hammer, Trojan, Xtra, First Response, Nair, Oxi-Clean, and Orajel. Church & Dwight’s top 11 brands represent more than 80% of total sales.

Acquisitions have been the key to Church & Dwight’s growth. The company acquired 10 of its 11 core brands.

 

Source: 2018 CAGNY Presentation, page 14

On 5/3/18, Church & Dwight reported strong earnings. For the 2018 first quarter, revenue of $1.01 billion increased 15% year over year, and beat expectations by $31.5 million. Earnings-per-share also beat expectations, by $0.02 per share. Organic sales increased by 3.8% for the quarter.

Church & Dwight’s two major growth catalysts going forward are e-commerce and international expansion. In the U.S., Church & Dwight is investing heavily to boost its digital capabilities, to capitalize on the booming growth of the e-commerce industry. For example, in 2015 online sales represented just 1% of Church & Dwight’s total sales. In 2017, e-commerce was 5% of total sales, and continues to grow.

In addition, Church & Dwight’s international business is growing at a high rate. International sales increased 7.8% in 2017, and are expected to rise 6% in 2018.

 

Source: 2018 CAGNY Presentation, page 59

Overall, the company expects 3%+ organic sales growth for 2018, along with 16% adjusted earnings-per-share growth.

Church & Dwight has a current dividend yield of 1.8%, which is a low yield that could be fairly unappealing for income investors. But what the stock lacks in yield, it more than makes up for with dividend growth. Church & Dwight has increased its dividend for 22 consecutive years, including a 14.5% dividend increase on 2/13/18. In the past five years, the company has increased its dividend by 9% each year on average.

Church & Dwight has a current share price of $46, and we estimate fair value is $49. As a result, an expanding valuation is not likely to be a major contributor to future returns. However, we expect the company to grow earnings by 10% per year. With a 1.8% dividend yield, total returns could reach 12% each year.

No. 5: Vector Group (VGR)

Expected Annual Returns: 13%

Vector has a current dividend yield of 8.3%, which makes it the highest-yielding stock on this list. Vector is one of 421 high-yield stocks with a 5%+ dividend yield.

Vector is a unique company. It basically has two different businesses under one umbrella, real estate and tobacco, which have little to do with each other. Vector owns Liggett Group, Vector Tobacco, and New Valley. The company’s total revenue mix is 60% tobacco, and 40% real estate.

Liggett was founded all the way back in 1873.

 

Source: 2018 Investor Presentation, page 5

In tobacco, Vector’s niche is discount cigarettes. Its brands include Eve, Grand Prix, Pyramid, Liggett Select and Eagle 20’s. Collectively, these brands provide Vector with a 13% market share in the discount segment.

In real estate, Vector’s New Valley business owns 70.59% of Douglas Elliman Realty, a diversified real estate company. As of June 30th, New Valley had invested approximately $205 million in a portfolio of 23 real estate investments. Douglas Elliman is the fourth-largest residential real estate brokerage firm in the U.S.

 

Source: 2018 Investor Presentation, page 11

On 5/9/18, Vector reported first-quarter financial results. Total revenue increased 3% year over year, and the company reported a first-quarter profit of $0.04 per share, compared with a loss of $0.04 per share in the same period a year ago.

The best aspect of investing in Vector is its cash returns. Vector has paid uninterrupted quarterly dividends since 1995. Not only does the company pays a hefty regular dividend, but it also pays a 5% stock dividend each year. That results in a total shareholder dividend yield above 12%, which is very attractive for income investors. We believe dividends will fuel the vast majority of Vector’s total returns, but its high dividend payments make the stock a particularly attractive pick for income investors.

No. 4: Mondelez International (MDLZ)

Expected Annual Returns: 13%

Mondelez International was created when Kraft Foods Inc. spun off its North American grocery business from its international business. The North American grocery business merged with Heinz to form Kraft-Heinz (KHC), while the North American snacks/international business trades as Mondelez.

Today, Mondelez generates annual revenue of approximately $26 billion, nearly 75% of which comes from outside North America. It sells its products in 165 countries around the world. The company’s product lineup includes biscuits, chocolate, gum, candy, and powdered beverages. Its core brands include Oreo, belVita, Cadbury, Ritz, Triscuit, and Trident.

On 5/1/18, Mondelez reported first-quarter financial results. Organic sales increased 2.4% year over year, thanks to the international markets. Organic sales increased 4.7% in Europe, 3.6% in the Asia, Middle East, and Africa segment, and 2.2% in Latin America. International growth more than offset a 1.8% decline in North America.

Adjusted earnings-per-share increased 9.6% from the same quarter a year ago. For 2018, Mondelez expects organic sales growth of 1%-2%, along with 10%+ adjusted earnings growth. In addition to sales growth, earnings will be driven by margin expansion.

 

Source: 2018 CAGNY Presentation, page 24

Mondelez recently announced the $500 million acquisition of Tate’s Bake Shop, which makes cookies and other baked goods. The brand’s sales have quadrupled over the past five years. Mondelez sees great potential for Tate’s, which quadrupled its sales in the past five years. In 2018, retail sales in measured channels had grown by more than 40% through March. The deal will boost Mondelez’s exposure to the premium category.

Mondelez has a 2.2% dividend yield, and on 9/27/17 raised its dividend by 16%. There should be plenty of room for future dividend increases, as the company is growing earnings at a high rate.

Our fair value estimate for Mondelez is a share price of $47. With a current share price of $39, we believe shares are undervalued, and Mondelez stock could return 4% per year just from expansion of the valuation multiple. In addition, we believe annual earnings growth and dividends will provide annual returns of 9%. As a result, total expected returns are expected to reach 13% each year moving forward.

No. 3: Kellogg Co. (K)

Expected Annual Returns: 14%

Kellogg has a 3.5% dividend yield, and it has paid over 370 consecutive dividends since 1925. Right now, Kellogg is struggling with shifting consumer preferences. Cereal sales are declining, due to sagging demand among younger generations like Millenials. This has compelled Kellogg to branch out into new product categories.

The good news for Kellogg, is that its turnaround initiatives are progressing well. On 5/3/18, Kellogg reported strong first-quarter earnings. Revenue increased 4.6% year over year and beat expectations by $100 million, while earnings-per-share of $1.19 also beat estimates by $0.11 per share. Organic sales rose 0.6% for the period, driven by a 2.9% increase in volumes.

Kellogg is well-positioned to respond to changing consumer demands. It has made several acquisitions in recent years, including the $2.7 billion acquisition of Pringles in 2012, to expand its lineup of snacks. Kellogg has a vast product portfolio outside cereal, with brands including Kellogg’s, Keebler, Cheez-It, and Pringles.

Kellogg management stated that the snacks industry is growing at 4% per year. By 2020, snacks are projected to be a $100 billion market. Kellogg’s snacks products like Cheez-It and Rice Krispies Treats have been among the company’s best-performing brands over the past year.

Kellogg’s snacks business puts it in particularly strong position in the high-growth emerging markets, where snacks make up more than 40% of sales volume.

 

Source: 2018 Annual Shareholder Meeting, page 8

Kellogg’s emerging market sales increased at a nearly 7% annual rate from 2013-2017. Thanks to continued strong growth in emerging markets such as Latin America and Asia, Kellogg expects 3%-4% sales growth and 9%-11% earnings growth this year.

Kellogg stock has a price-to-earnings ratio of 13.2. That is well below its 10-year average price-to-earnings ratio of 16.8, which indicates the stock is undervalued. We estimate a rising valuation could add 5% to Kellogg’s annual returns. In addition to 5% projected annual earnings growth and a 3.5% dividend yield, we believe total returns could reach 14% per year.

No. 2: Altria Group (MO)

Expected Annual Returns: 15%

Altria Group was founded by Philip Morris in 1847. Today, it is a tobacco giant. It sells the Marlboro cigarette brand in the U.S., and a number of other non-smokeable brands, including Skoal, Copenhagen, and Ste. Michelle. Altria also has a 10% ownership stake in global beer giant Anheuser Busch Inbev (BUD).

 

Source: Investor Day Presentation, page 12

On 4/26/18, Altria released strong first-quarter earnings. Quarterly revenue of $4.67 billion increased 1.7%, and earnings-per-share of $0.95 rose 30% year-over-year. Revenue and earnings-per-share both beat analyst expectations, by $40 million and $0.03 per share, respectively. Revenue in Altria’s smoke-able products declined 0.8% for the quarter. In wine, Ste. Michelle grew volume and revenue with wine shipment volume up 6.1%.

Going forward, Altria’s growth will be fueled by price increases and new products. Altria enjoys strong brands across its product portfolio, including the No. 1 cigarette brand. This allows for steady price increases each year. In addition, Altria is innovating new products, to help offset the declining smoking rate.

 

Source: 2018 CAGNY Presentation, page 16

Altria’s non-combustible product portfolio includes e-vapor and e-cigarettes.  The company is awaiting regulatory approval from the Food & Drug Administration for its new reduced-risk product line called IQOS. Altria’s reduced-risk products heat tobacco rather than burn it, which Altria believes results in fewer harmful side effects.

We expect Altria’s future returns will be driven by earnings growth, which we expect to reach 6%-8% per year, in-line with the company’s historical growth rate. In addition, Altria has increased its dividend 52 times in the past 49 years, and the stock has a current dividend yield of 5.1%.

Altria stock trades for a price-to-earnings ratio of 13.8. In the past 10 years, Altria stock traded for an average price-to-earnings ratio of 16.2. As a result, the stock appears to be undervalued, and an expanding valuation could boost annual returns by approximately 3%. In addition to earnings growth and dividends, Altria stock has total return potential of 15% per year, which is a highly attractive rate of return.

No. 1: Walgreens Boots Alliance (WBA)

Expected Annual Returns: 20%+

Walgreens is the largest retail pharmacy in both the United States and Europe. The company operates approximately 13,200 stores in 11 countries.

It also operates one of the largest global pharmaceutical wholesale and distribution networks, with more than 390 distribution centers that deliver to upwards of 230,000 pharmacies, doctors, health centers, and hospitals each year.

Retail is a difficult industry right now, particularly when it comes to pharmaceutical products. Falling prices for pharmaceuticals is reducing margins for Walgreens. And, there is a constant threat that Amazon (AMZN) might enter the pharmacy retail space at some point.

Still, Walgreens continues to post strong operating results. On 3/28/18, Walgreens reported fiscal second-quarter earnings.

 

Source: Earnings Presentation, page 7

For the quarter, organic sales increased 9.4%, while adjusted earnings-per-share increased by 26%. Walgreens grew its Retail Pharmacy segment comparable-store sales by 2.4% last quarter.

However, comparable retail sales declined by 2.7% for the quarter. Fortunately, the pharmacy side of the business performed extremely well, with 5.1% comparable sales growth and 4.0% comparable prescription growth.

 

Source: Earnings Presentation, page 10

For 2018, Walgreens expects adjusted earnings-per-share of $5.85 to $6.05 this year. At the midpoint of guidance, Walgreens expects 17% earnings growth for 2018. We expect 8%-10% annualized growth in earnings per share going forward, along with Walgreen’s 2.5% dividend yield.

Even better, we view Walgreens as significantly undervalued, which should add to future returns. Based on the midpoint of 2018 earnings guidance, the stock trades for a price-to-earnings ratio of just 10.9. This is well below our estimate of fair value, which is a price-to-earnings ratio of is 16.7. If the company’s valuation can revert to its historical mean over a time period of 5 years, this will add 9% to the company’s annualized returns.

Combined with dividends and earnings growth, Walgreens could produce excellent total returns of 20%+ each year moving forward.