Dividend.com’s Cheatsheet to Finding the Best Retail Stocks

The term “retail stocks” refers to companies that are engaged in the selling of finished goods to consumers. The retail industry is closely monitored by experts and investors alike since roughly two-thirds of the United States’ annual economic output, referred to as gross domestic product (GDP), is made up up consumer spending. As such, being aware of major trends in the retail industry can give you better insights into the overall health of the U.S. economy and stock market.

Retail stocks span a variety of sectors, covering everything from traditional brick-and-mortar shops to online catalogs, which makes this one of the most diverse families in the equity market. Because of this wide reach, the retail industry can be challenging to analyze for both beginners and seasoned professionals.

Economic and nonfinancial factors that affect the retail industry (a topic that we cover in-depth later on), including interest rates and fashion trends, have vastly different impacts on the different sub-industries; for example, discount stores and grocery chains have fairly inelastic demand for their products compared to jewelry and electronics stores, which means that the former group might be good at weathering recessions but the latter will outperform when recovery takes root.

Knowing the various factors impacting the retail industry is only half the battle, being aware of each sub-sector’s nuances is challenging, but equally important.

How Are Retail Stocks Classified?

The retail industry spans far and wide, and as such, the simplest way to go about grasping its scope is to look at the products for sale. Retail companies sell products that fall into one of these three broad categories:

The industry can further be categorized into the following sub-categories:

Durable Goods – Also known as “hard goods,” these products have an expected lifespan of over three years and can be found in electronics and appliances, sporting goods, and furniture stores.

Consumables Also know as “soft goods,” these products have an expected lifespan of less than three years and can be found in clothing and apparel stores.

Food Products These everyday products can be found in grocery chains, supermarkets, warehouses, and specialty stores. For the most part, this category is often lumped in with Consumables.

Department Stores This includes companies that offer a diverse lineup of both “hard” and “soft” goods for sale, such as Wal-Mart (WMT ) and Target (TGT ).

Discount Stores This includes companies that also offer a diverse product lineup, but are more focused on lower-priced goods such as Family Dollar Stores (FDO ) and Ross Stores (ROST ).

Demographic This includes companies that target a particular consumer segment, for example luxury retailers like Coach (COH ) and Tiffany & Co. (TIF ) focus on wealthy individuals.

Ecommerce This includes companies that specialize in online distribution and deliver products to the customer’s doorstep such as Amazon.com and eBay.

To find the top retailers in each of these categories, check out the National Retail Federations Database .

How Do Retail Stocks Fit Into a Dividend Portfolio?

Dividend investors can utilize retail stocks in a number of ways; however, it is important to first recognize the varying degrees of cyclicality that companies in this industry tend to exhibit. Consider the table below, which compares the most popular investment factors of the retail industry, as represented by the S&P Retail Select Industry Index, relative to that of the broad stock market, as represented by the S&P 500 Index.