The Dividend Growth Grade That Hides Consumer Staples' Valuation Problem

Yesterday a piece went around calling out "ten consumer staples stocks with the strongest dividend growth grades," putting names like Colgate-Palmolive and Costco at the top with an A+. It's the kind of article that makes you feel like you've found a list of safe, growing income stocks — the sector that was supposed to shelter you when everything else gets messy.

Before I tear into the list, let me be clear: the idea isn't wrong. Consumer staples companies make toothpaste, detergent, and soft drinks. People buy those things regardless. But the idea that "dividend growth grade" tells you which ones are actually safe? That's a sorting trick, not an analysis.

Here's what I want to show you today: when consumer staples trade at multiples we haven't seen since 1999, the difference between a dividend that grows because the business earns its way there and one that grows because the board doesn't want to break the streak — that difference matters more than any grade. Let's get right to it.

The sector at 1999 multiples

The forward P/E for the S&P 500 consumer staples index hit its highest level since June 1999 earlier this year, according to LSEG data cited by Reuters. It's come off that peak a bit since March, but the sector is still trading well above its five-year average near 20.

Now, staples rallied early in 2026 as investors rotated out of overextended tech. The XLP consumer staples ETF jumped 7.5% in its first six trading days of the year — its strongest short-term run since 2022. Then it all fell apart. Earnings forecasts got slashed from 6.6% expected growth to 1.9% for the first quarter. General Mills cut its guidance. Campbell's cut its forecast and suspended buybacks, with its stock at its lowest level since March 2003. The sector has given back most of those early gains.

You don't buy toothpaste makers at bubble-era multiples and then expect the dividend growth story to save you.

The payout ratio tells you what the grade hides

So let's actually check the mechanics. How is each company's income produced? Is it covered by earnings? By free cash flow? Or is the board raising the dividend because stopping would feel worse than stretching?

Procter & Gamble (PG) trades at about 21 times trailing earnings. That's below the sector average and about what you'd expect for a company of this quality. The dividend yield is roughly 2.9%, with a payout ratio of 59%. Free cash flow over the trailing twelve months came in at $15.2 billion, more than three times the $4.3 billion it paid out in dividends. P&G has raised its dividend for 22 consecutive years. The dividend is real, it's covered, and there's breathing room.

Coca-Cola (KO) is at 26.5 times earnings — above the sector, but not absurd for a global brand with $14.3 billion in free cash flow. The 2.4% yield is backed by a 65% payout ratio. 23 consecutive years of increases. This one checks out too, though you're paying more for the privilege.

Now here's where the "dividend growth grade" starts to mislead.

Colgate-Palmolive (CL)got an A+ on that list. It's raised its dividend 23 years in a row, no question. But it trades at 34 times trailing earnings — the highest multiple of any of these — and its payout ratio sits at 80%. Its free cash flow of $3.9 billion barely clears the $2.1 billion it pays in dividends. That's not a buffer; that's a constraint. And the balance sheet is leveraged in a way that should make you pause: total equity stands at just $566 million against $16.2 billion in debt. Yes, $566 million. The debt-to-equity ratio is 13.9 — a number that only exists because the company has bought back so much stock over the years that book equity has been nearly erased. Colgate makes real money and pays a real dividend, but at 34 times earnings with an 80% payout ratio, that A+ grade is grading on a curve where the only thing that matters is whether they increased the check. It doesn't tell you that you're paying a Colgate premium for a dividend with very little room to grow.

Altria (MO) yields 6.2%, which is the number that catches eyes. Twenty-three consecutive years of dividend growth. But the payout ratio is 88%. Total equity is negative $2.6 billion. Debt-to-equity is negative 9.4 because, again, all that buyback activity has torched the balance sheet. $9.1 billion in free cash flow covers the $4.3 billion in dividend payments — so the dividend isn't going away tomorrow. But 88% of earnings going to shareholders means there's almost nothing left for reinvestment or cushioning a down year. The income here isn't an escalator; it's a slow bleed of capital disguised as yield. Not terrible if you understand what you're doing, but it's not the same thing as P&G's 59% payout ratio at a 21 P/E.

And then there's Kenvue (KVUE).

Kenvue spun out of Johnson & Johnson two years ago. It makes Tylenol, Band-Aid, and Neutrogena. The current yield is 4.7%, which looks attractive. But the payout ratio sits at 98% — essentially 100% of earnings. Simply Wall Street puts the earnings payout ratio at 108%, meaning the dividend literally isn't covered by earnings. The company increased its quarterly dividend to $0.21 per share in July, a 1.2% bump, despite paying out nearly everything it earns.

That's before you even get to the fact that Kenvue is being acquired by Kimberly-Clark in a deal expected to close in the fourth quarter. Shareholders approved it in January, the antitrust waiting period expired, and the transaction is now waiting on EU regulatory clearance. The dividend question becomes moot if the deal closes — Kimberly-Clark will set its own dividend policy for the combined company.

A "dividend growth" stock that's paying out everything it earns while simultaneously being sold? That grade isn't telling you the dividend will grow. It's telling you the company increased the dividend twice since going independent, once by 1.2%. Two years, two increases. That's the record behind the grade.

What this actually means

The point isn't that you should avoid consumer staples. The point is that "dividend growth grade" as a sorting mechanism collapses the enormous difference between P&G — which raises its dividend with a 59% payout ratio from a business generating $15 billion in annual free cash flow — and Colgate — which raises its dividend with an 80% payout ratio from a company trading at 34 times earnings with $566 million in book equity.

Both get an A+. Neither grade tells you about the margin of safety.

When you're looking at staples for income, check the mechanism first. Payout ratio. Free cash flow coverage. What the balance sheet looks like after two decades of buybacks. Then, and only then, look at the grade.

The biggest risk here isn't that consumer staples are broken. It's that at 1999-era multiples, the sector's valuation is doing most of the heavy lifting in the investment case, and valuations can snap back. Campbell's trading at its lowest level since 2003 inside a sector that peaked at multiples we haven't seen in nearly three decades tells you the dispersion is enormous. There are real businesses here and there are stretched ones. The grade doesn't distinguish between them.

I own P&G. I don't own Colgate at these multiples. That's my book, at my age, and it's not a recommendation for yours — but it is the honest version of where the evidence puts me.

Stay tuned!