Investing In Companies That Sell Products/Services That Even Frugal People Use

I’m a frugal guy. I’m 31 years old with six figures in the brokerage account and I earn a decent middle class income. Yet I drive a 16 year-old car, live in a modest two bedroom apartment and consider $1 Redbox rentals a great Friday night companion.

Some people then might find it funny that I invest in companies that need to sell abundant products and/or services to people in order to turn a profit and then send me a portion of those profits in the form of dividends. How do I reconcile personal frugality and the necessity for consumption in order to fund my lifestyle?

Well, it’s simple. I mainly target my precious capital towards investments in companies that sell products and/or services that even frugal people use. The reason is simple: if frugal people like me use these products and services, then that’s surely scalable up the consumer chain.

For instance, one of my larger investments is with PepsiCo, Inc. (PEP). I may be frugal, but I still love to consume the products this company produces. Just today I picked up a 12-pack of Propel grape flavored sports water and a bag of Baked Lay’s BBQ chips. A guy’s gotta eat, right? I may not like to spend more money than I have to, but drinking water is something I must do if I want to survive and I personally love the great flavor of Propel flavored water. Pepsi and Mountain Dew, health concerns aside, are also both products that I enjoy regularly.

Guess where I bought my Propel and Lay’s potato chips today? I shopped at Wal-Mart Stores Inc. (WMT), of course. That’s because I know it’s much cheaper than any of the smaller grocery stores in my area (namely Publix). I know I can get everything I need in one stop, and at the best possible price. I not only grabbed my groceries for the week there, but also picked up a sweet $4 auxiliary cable so that I can hook up my ancient iPhone 3G to the radio in my new Frugalmobile and listen to some rockin’ tunes on the tinny and underwhelming sound system. The kind of product selection that Wal-Mart offers at the available prices is unmatched. Frugal people like me appreciate that.

Although I have a car now, I was living car-free for over two years. I mostly used the bus over that time frame, but also loved to ride my 49cc scooter for local errands and occasional trips to work when the weather allowed. This cheap transportation was fantastic on the wallet, but the bus and the scooter have something in common: they both need fuel to run. If you take a look at my Freedom Fund, you’ll notice significant investments in energy companies like Chevron Corporation (CVX), Kinder Morgan Inc. (KMI), Exxon Mobil Corporation (XOM) and ConocoPhillips (COP).

America, like the rest of the world, consumes significant energy resources every single day. And even someone like me, riding the bus and a small scooter, also consumed energy. The bus used fuel to propel me and other passengers down the road, and although my scooter got 100 mpg the fuel tank was not bottomless. I still had to fill up a few times per month. And now that I have a car I’ll be consuming more energy than ever. Yeah, I’m frugal. And yes, my little 4-cylinder engine is fuel efficient. But you’ll still see me stopping by my local Mobil station to get fuel when my low fuel light comes on.

Frugality is wonderful. I appreciate what the power of a high savings rate has done for my ability to build wealth over the last three years. However, even frugality has its limits in regards to consumption. Frugal people still need to eat, drink, consume energy, talk on the phone, use the internet, bathe and groom themselves, clean their home, brush their teeth, use medicine when they’re sick, entertain themselves, etc. I feel great knowing that even if the entire world “went frugal” tomorrow that the majority of the companies I invest with would still be alive and well, and still likely sending me dividends with which I’ll be using one day to purchase the products and/or services they provide! It’s great knowing that the Propel water I’m drinking as I write this article is paying me as well as refreshing me.

What about you? Enjoy investing in companies that even frugal people need?

Full Disclosure: Long all aforementioned securities.

Thanks for reading.

Photo Credit: hin255/FreeDigitalPhotos.net

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28 Comments

  1. Investing Pursuits,

    Absolutely! I’m actually going to write a companion article to this post that expands on that thought. Investing is best when kept relatively simple. 🙂

    Best wishes.

  2. There’s clearly money to be made by owning companies that provide services or products to the masses. The dividend aristocrat list is filled with those types of companies. Want to drive your car? Well there’s exxon and chevron. Want to eat some chips? That’d be pepsi. Want to drink a soda? Pepsi again or Coke. Want to wash your clothes? That’d be PG. Clean your house? How about clorox. Clean your face/body/teeth? PG again or Colgate. Headache? Well take some tylenol and buy some JNJ. The list keeps going.

  3. Always fascinates me to see the products or services of a company I’ve looked into from an investment perspective. And as you’ve alluded to above, there doesn’t have to be anything overly complicated about investing, especially when it comes to the stable giants we as consumers have come to know and love.

  4. DM,
    I have always made an effort to invest in companies that produce the products people need. Healthcare, consumer staples and energy especially. It’s unfortunate that the consumer staples sector is so expensive right now, but energy and healthcare have some values.

    Here’s hoping Mr Market serves us up some good buy opportunities before the bureaucrats in Washington gets off their asses and gets something done.

    -Bryan

  5. I’m always amazed at the strength a brand label will carry. When I pass people in the grocery aisle or waiting in line they’ll be talking about what they need to skip to meet their budget or what they need to put back. They have KO, KMB, PG, KFT brand labels. They could go store brand and get everything they want but they don’t.
    Thats one of the big reasons I am a dividend investor.

  6. After reading blogs like yours and others and just starting with dividend investing, I catch my self looking at all kinds of product and who makes them. I have a whole new way of looking at things I buy now. I’m always checking if its a public company and how are they doing.

  7. Off-price apparel retailers like Ross and TJ Maxx likely see many frugal shoppers. Before I moved, I shopped at both stores; I still shop at TJ Maxx (there is no Ross store where I now live) and I discovered it’s a great place to buy dress pants for low prices. I am long ROST.

  8. I don’t think a company gets big enough to be a dividend growth company without producing something that a lot of people use. Unfortunately, I don’t feel warm, fuzzy thoughts about the companies I own–I fear it’s also hard to become a dividend growth company without at least becoming highly tempted by evil.

    I am not proud of the fact that I make money from companies that pollute the world, abuse workers, promote junk food, etc. In fact there are very few businesses I fully or almost fully support, and most of those are coops or family owned.

    Nevertheless, those companies are out there doing what they do, and I may as well get them to send some of their ill-gotten gains to me. Mwahaha! Plus, when I write a letter it has a little more impact if I’m a stockholder. Owning stocks in these companies puts me in a win-win situation–either a scummy company is failing or it’s paying me money.

    If everyone goes frugal or insists on buying only from companies that are fair and decent, then I expect I’ll be modifying my holdings to fit the new reality.

  9. Pursuit,

    Absolutely. Even though I’m fairly frugal, I’m still a human being who needs to get around, eat food, drink liquids, talk on the phone, heat and cool my home, wear clothing and everything else other consumers do. My consumption is just on a smaller scale.

    It’s great to know that short of an apocalypse, these companies will likely keep selling their products because people want/need to consume them.

    Best regards.

  10. w2r,

    Investing doesn’t need to be complicated. In fact, I would argue that the more complicated an investment is the worse off you’ll probably be by putting your capital to work with it.

    Cheers!

  11. scott,

    I also failed to include Phillips 66 (PSX), but my point wasn’t to include every company I own in a sector. Rather, I was simply trying to illustrate how even frugal consumers like myself still patronize these high quality companies’ products. 🙂

    Take care!

  12. Pulling Myself Up,

    That’s an interesting point. When I was living really frugally, and focused a lot of my attention on my food expenses I made a point to target off-brand products. The quality may not differ according to a label, but I found a fair enough amount of differences to notice. The cheap bread didn’t taste as good, the store brand cereal didn’t have the same crispness and don’t even get me started on store-brand soda. 🙂

    I think the strength and quality of brands, real or perceived, is something I can bank on!

    Best regards.

  13. FFdividend,

    I also do that. I was at Wal-Mart yesterday shopping around and I was walking down the salad dressing aisle because I needed some mayo for my daily dinner sandwiches. I found myself looking at the labels of all these fancy sauces that are priced at a premium wondering who makes them. I think that kind of research is a lot more fun than the typical check on income statements and what not.

    Cheers!

  14. DGM,

    Great point there. The retailers that sell the premium brands a low price are definitely a great investment to specifically target frugal minded consumers. I’ll have to take another look at Ross and TJ Maxx. The only thing I don’t like about the stores (and we have both along the bus line here) is that they’re typically not as clean or organized as one would expect. However, that doesn’t seem to really detract any would-be shoppers.

    Best wishes.

  15. Passivization,

    Cool name. I’m also looking to “passivize” my income. 🙂

    Great quote by Buffett there. Although I can admit that I don’t totally understand all the ins and outs of all the businesses I invest in, I think I can describe at least the basics with a fair degree of confidence. Some are easier to understand than others, but I think if you stick with those that you clearly understand you’ll be much better off in the long run. You’ll notice I have a rather small exposure to the tech exposure, and that’s for good reason.

    Best regards!

  16. Debbie,

    I don’t know if I’d agree that companies are inherently somehow evil. I think certain companies prosper because they sell the goods/services that people truly want. People may talk about the evils of food that’s bad for you and how they want to lose weight, but McDonald’s is selling millions of cheeseburgers because that’s what people are buying. Maybe it’s people that are evil, not the corporations?

    But, if that’s your viewpoint then you are right: you’re in a win-win situation! They either become unprofitable, which would align well with your views, or they continue to stay massively successful and you reap the rewards in the form of dividends.

    Best wishes.

  17. Hi DM, this reminds me of a well known Warren Buffet quote ‘Never invest in a business you can’t understand.’ sometimes people tend to look blindly at metrics and ratios without understanding the business, being a consumer is one of the best ways to understand a business!

  18. I agree with the idea of frugal retail stocks like WMT and TJX being winners, especially during an economic downturn. You can also add Dollar General and other dollar stores into that category. Then the every day use stocks like CLX, KO, CVX……most of us need gas, cleaners, and even the poorest of Americans drink soft drinks regularly (not that they ‘need’ them).

  19. Retire Before Dad,

    Great ideas there. I agree that the cheaper retailers could be a nice addition, and probably more recession-proof than some other companies. I don’t personally shop at dollar stores, but I can see the appeal. It’s nice to know you can get in and out pretty quickly, and not spend a whole lot of money in the process. 🙂

    Best regards.

  20. That’s a great attribute of a good divident growth company…so strong that even frugal people buy their products. I know MCD will be around for many decades to come because even I succumb to my fast food cravings. What’s more, the restaurant sells KO products and sits right next to a CVX gas station. Ain’t that wonderful?

  21. Integrator,

    Absolutely!

    I personally make it a point to eat at MCD whenever I’m hungry and in the mood for fast food. Not only because I’m a shareholder, but because the $1 McDouble and $1 McChicken satisfies both my hunger and frugality (along with my tastebuds). 🙂

    Cheers!

  22. Spoonman,

    I wrote this article as a tongue-in-cheek response to those that espouse the negative aspects of frugality, intending to prove frugal living as a negative lifestyle because if everyone were to live this way then the economy would crumble. I’m no economist, but I wanted to show that even frugal people are still consumers, just on a smaller scale. And the fact that many of the companies us ERE/FI minded people invest in can still cater to frugal people makes it all the better.

    The ubiquitous nature of many of these companies’ products/services is also extremely attractive, and I wrote a companion article to this one which was published about 10 minutes ago.

    Best wishes!

  23. I couldn’t agree more! I look at it the same way and buy a lot of the products companies I own make. I like to say to myself I own a piece of that company when see other people filling up their carts too. It is so clear to me that the strategy works yet so many people downplay it or just say it is gambling. I think it was Peter Lynch who ran the Fidelity Magellan fund who used to go to the mall and see what others were buying to get an idea/edge on investments. I don’t think dividend investing deserves some of the negative judgements from people who never tried it or understood how it works tend to give. When there are some dominant companies that continue to increase earnings and pay dividends for over a century it makes me one happy, loyal shareholder, and consumer. We are helping each other out everytime we go out of buy a Pepsi/Coke as I do so frequently!

  24. SWAN,

    Absolutely. There are naysayers that predict the downfall of major companies every single day. While the past is no guarantee of future performance, it’s tough to imagine companies like Coca-Cola or Johnson & Johnson falling off the map anytime soon. High quality products, massive distribution channels and brand name recognition means these companies have dug substantial moats around the businesses. I have faith in their ability to keep sending me those rising dividend checks for decades to come. 🙂

    Cheers!

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