What Are Defensive Stocks?

What Are Defensive Stocks?

If you ask an investor about his or her portfolio, you’re sure to find that defensive stocks are always present. But what are defensive stocks?

Defensive stocks are stocks that give constant dividends. This also means that you’ll have steady earnings regardless of the overall state of the stock market. These stocks sport a constant demand for their products, which means that they are stable throughout the various phases of the business cycle.

One thing that you should remember: “defense stock” is different from defensive stocks. Defense stocks refer to stocks in businesses that manufacture things like weapons, ammunitions, and fighter jets. Careful with that!

Why Choose Defensive Stocks?

Defensive stocks are a must among investors. Why? When a market recession takes place, defensive stocks tend to perform better than the market.

The only drawback is that during an expansion phase, these stocks tend to perform below the market. This is usually blamed to these stocks’ low beta, which are typically less than one.

Examples of Defensive Stocks

We bet you that you can name examples of defensive stocks. You may even do that without realizing it.

The utility industry is a great example of such stocks. This is because during all the phases of a full business cycle, people need and use gas and electricity. Investors tend to invest in these stocks when they expect a market downturn. Otherwise, many investors add stocks with higher betas to add to their return.

Defensive stocks are also called non-cyclical stocks. This is obviously because of their very low correlation with the business cycle.

Moreover, companies that distribute consumer staples may also be considered defensive stocks. These are goods that people buy because they are necessary for their day to day living, regardless of the economic conditions. They can be food, beverages, hygiene products, tobacco, medicines, and other similar items.

You can imagine that these companies generate steady cash flow and predictable earnings during both strong and weak economies. It goes without saying that these stocks usually outperform non defensive or consumer cyclical stocks.

For Your Portfolio

Now, we think that the role of defensive stocks in your portfolio is quite obvious: it protects your profits during weak economies or even periods of high volatility.

Other examples of defensive stocks that you may want to try are Procter & Gamble Co, Johnson & Johnson, Phillip Morris International Inc, and Coca-Cola Co. They have strong cash flows, plus they have strong operations with the ability to endure turbulent economic conditions. Oh, we almost forgot—they also usually pay dividends. Finally, defensive stocks have consistently outperformed most sectors since 1962.

So, if you’re thinking of investing in such stocks, they’re definitely going to be a good addition to you assets. You could also take help of experts like HQBroker .

Categories: Finance

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