Contents
- What is a Defensive Stock?
- Defensive Stocks and Economic Growth
- Getting A Better Understanding of Defensive Stocks
- Which Industries Have Defensive Stock Market?
- Why Should I Invest in Defensive Stocks?
- Advantages of Defensive Stocks
- What is the Best Time to Buy Defensive Stocks?
- Best Defensive Stocks To Invest In
- Conclusion
- FAQs
What is a Defensive Stock?
A defensive stock is a stock that offers consistent dividends and stability to returns despite the state of the stock market or the economy. Conservative investors look towards a safe haven and capital at the same time by investing in defensive stocks.
With the demand for products and different phases of the business cycle all in one, these defensive stocks tend to get stable.
Defensive stocks are not defense stocks. Defense stocks are such stocks of companies that deal with fighter jets, ammunition, and weapons among other things.
Also Read: Space Stocks
Defensive Stocks and Economic Growth
Another name for defensive stocks is non-cyclical stocks. This is as a result of the less risk and stability these stocks maintain even in the face of recession and expansions. Dividends are consistently paid and the share price is constant during most business cycles.
Defensive stocks act as a defender against loss in an investment portfolio. Expectations of huge profits should be debunked, while stable profits should be expected. Amid an economic growth or recession, most investors and market participants move towards defensive stocks. This stock performs better than non-defensive stocks that sell discretionary products.
This is for portfolio management as these defensive stocks are likely to be in high performance regardless of the economic hardship.
Cyclical stocks are stocks that see through the economic and business cycles by appreciating in times of good swings and depreciating during the economic downturn.
Getting A Better Understanding of Defensive Stocks
Portfolios are always protected in times of a weakened economy or times when there is high volatility. This leads to the disclosure of defensive stocks as investors want to keep things under control. There are well-established companies that are considered defensive stocks.
They include Coco-Cola (KO), Johnson & Johnson (JNJ), Procter & Gamble (PG), and Philip Morris International (PM) among other stocks.
These companies engage in stable businesses along with having a strong cash flow to manage weak economies. These companies pay dividends that can control stock prices and get stable earnings amid market downturns.
Why do investors see the need to invest in stocks during harsh economic times? Why are they not turning to a treasury bill with risk-free return rates?
The greed and fear that drive investors are best accommodated by defensive stocks through high dividend yield. This high rate of dividend yield is better gotten from environments with low-interest rates or slower economic environments.
Defensive stocks do a good of relieving investors of their fear because of the low risks involved, unlike others. Most investment managers you know own stocks and they switch to defensive stocks when hard times are speculated.
Since defensive stocks are from different sectors that produce and offer necessities or consumer staples, they tend to perform better during recessions. These defensive stocks perform below the market during the expansion phase.
Stock volatility is measured to the overall stock market by Beta. So defensive stocks come with low beta because of their partial relation to market swings.
Which Industries Have Defensive Stock Market?
These stocks are not in full cohort with the business cycle so you can also call them non-cyclical stocks. A few industries with defensive stocks are mentioned below.
Consumer Staples
People would always buy consumer staples out of necessity despite the economic condition. So companies that manufacture or distribute are generally thought to be defensive. Some of the necessities which would always be in demand include beverages, hygiene products, household items, tobacco, and food.
Steady cash flow, as well as predictable earnings, are generated by these companies regardless of the economic condition.
Apartment REITs
Due to the regular demand for a place to live and carry out business activities, apartment real estate investment trusts are defensive. If you’re looking to invest in REITs, stay away from investment trust that majors in ultra-high-end apartments.
You should also avoid industrial parks and office building REITs because they get on the downside when business gets slow.
Healthcare Stocks
Defensive stocks in this case are the shares of medical device makers and major pharmaceutical companies. These companies cannot stay out of business because people fall sick all the time so they would medical products and services.
These defensive stocks are gradually losing their touch because of the competition involved and regulations in place.
Discount Retailers
When an economy is experiencing a massive market downturn, consumers migrate to things that bring good value. Those who suffer the most during this period are retailers with any small business. Some will experience huge losses while those who play their cards right will be just fine.
Companies under this category are those that operate with large economies of scale. They offer lower prices, unlike their competitors.
Utilities
People and businesses cannot stay without basic amenities; hence utility companies cannot falter. Defensive stocks, in this case, include; gas, electricity, and utilities water. When the interest rates tend to be lower than expected these companies benefit greatly from a slower economic environment.
Why Should I Invest in Defensive Stocks?
Reasons for investing in defensive stocks vary with people and companies. However, some of the reasons why you should invest in defensive stocks would be discussed below.
Less Experienced Investors Would Learn Better
Investors with little or no knowledge about the stocks can start with defensive stocks. These less experienced investors can have a feel of the market without exhausting their capital with regular stocks. Defensive stocks are also a good choice for risk-averse investors. It offers appropriate rewards. reduces risks and protects from rising commodity prices.
Steady Revenue Stream Through Dividend Yields
Aside from helping with shares trading, defensive stocks are means of making a good income. It offers the best dividends during the bull and bear markets, leaving investors with steady revenue streams.
When there is neither a bull nor a bear market, defensive stocks are highly volatile. In this case, having defensive stocks will protect investors’ capital and reduce risk. You can say it is one of the best investments.
Reduces Portfolio Volatility
In times of recession, many investors tend to rely on these defensive stocks for protection from losses. Defensive stocks added to portfolios act as a defender and reduce portfolio volatility.
In the bear run, the defensive companies provide a high dividend yield that results in a good addition to any investor’s portfolio.
Advantages of Defensive Stocks
Low Market Risk:
Investors are attracted to defensive stocks because of the very low risks involved. The stock helps investors in protecting their wealth again weak economies and market downturns. Companies that operate on lower risk tend to maintain their value over time and investors’ capital.
Stability:
The instability of the bull market and low volatility make investors and customers paranoid. Defensive stocks bring long-lasting solutions to all these as it stabilizes your portfolio.
Those involved in the defensive stocks are somewhat predictable; this makes your portfolio protected against any sudden market swings.
Substantial Benefit:
With defensive stocks, only long-term gains are seen. These gains are beneficial and they come with much lower risks than other stocks with more risk. Defensive stocks also have high Sharpe ratio than the overall stock market.
Performs Better During Recession:
Defensive stocks are known to have high-performance levels during weak economic periods. These defensive stocks outperform all cyclical stocks. Losses encountered by the growth stocks during an economic recession are balanced by non-cyclical stocks.
What is the Best Time to Buy Defensive Stocks?
If you’re looking to buy stocks, the hours of 9:30 am to 10:30 am ET period is the best hours of the day for trading. The biggest moves can be done in the shortest amount of time. Most professional traders close their trading around 11:30 am. This is when volatility and volume come to a close.
Best Defensive Stocks To Invest In
Not all defensive stock would remain defensive, so it is important to focus on those that would remain highly defensive over the years. The companies regarded as defensive stock are leaders in their fields and are large. They have stable cash flows and a strong growth rate. Best Defensive stocks are the securities mentioned below:
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Johnson & Johnson (JNJ)
This is one of the top picks for healthcare and consumer packaged goods. Johnson & Johnson has a $400 billion market cap play from consumer goods or essentials to Covid-19 vaccines.
If you have concerns about the new wave or variant of Covid-19, investing in this company which aims to curb the situation is a good move. The stock is a cyclical one because its capitals vary from time to time.
JNJ can stay steady during several economic conditions. Its volatility is almost unseen in comparison to the overall market. The company is very diversified and could be referred to as a global giant. Its supply chain is very wide and massive. During periods of uncertainty, you should consider investing in JNJ.
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Coca-Cola (KO)
This company has grown from being about sugar to providing safe drinking water. The company now has 8 eight different bottled water brands including SmartWater and Dasani. Its market value is currently at $211.7 billion, dividend yield at 3.4%, and it focuses on beverages.
In 2017, Coca-Cola focused on margin and image improvement. It sold sugary soda in smaller cans and acquired Costa Coffee which is similar to Starbucks.
The company has a focused marketing strategy, and its portfolio is very profitable. Compared to other companies Coca-Cola managed the pandemic situation perfectly.
The share price of Coca-Cola has the away from home business rebounds. KO is one of the best stocks to buy because of unexpected economic hardship. Its dividend has improved over the years, and its market share gives Coke an expanded revenue stream.
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Procter & Gamble (PG)
This is one of the leading consumer goods in the market presently with a net income of $2.9 billion. Investors tend to go hard on this defensive stock on a steady economic recovery. PG has transitioned in a very consistent manner over the years.
Although there have been trying times, the company is seen as the strength of North America and global economies as well. Holding the shares of PG stock for long periods assures you of a long-term benefit. Production of the daily-use items has been as defensive as ever.
The majority of the global population uses Proctor & Gamble, and its product brands have been streamlined to almost 80 brands. Its stock has benefitted from the wide margins seen over the years.
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Pfizer (PFE)
As a pharmaceutical giant, Pfizer tops the defensive stock market currently. The Price-to-earnings ratio is the current trading situation of PFE stock. Long-term investors should turn to this defensive stock.
The top cash flow generator for the company is Pfizer’s Covid-19 vaccine. The company is looking to create even more revenue in the future with an increase in its vaccine production.
Investors are offered an enormous flow of drugs that undergo clinical trial phases. In 2025, Pfizer seeks to increase its revenue by 6% through drug sales without the Covid-19 vaccine.
Pfizer is also looking to invest around $9 to $10 billion in research and development to increase its growth and share price in the future.
Conclusion
Defensive stocks are stocks that do well and thrive regardless of any economic change. Before involving defensive stocks go through the relevant features of an individual stock. Check out the size, dividend payout, and historical returns of the company. Every feature should tell that it is defensive.
These are some of the several tools one can use in managing risks in their portfolio. Investors look out for diversified strategies that cover the right amount of cyclical or growth stocks. Be sure to find the right balance while investing.
Also Read: What Are Cyclical Stocks?
FAQs
What is a good defensive stock to buy?
There are quite many defensive stocks for potential, less experienced, and experienced investors as well. Every defensive stock is a great buy but you can turn to those mentioned above if you have difficulty making a decision. However, some of the good defensive stocks include Johnson & Johnson (JNJ), Pfizer (PFE), Freeport-McMoRan (FCX), Procter & Gamble (PG), and Merck (MRK).
What is a defensive growth stock?
A defensive growth stock is a stock that is structured to flow and adjust to exposures including growth, and even defensive assets. This is based on the confidence and performance of the investment market. A defensive growth stock aims to reduce volatility.
What stock sectors are considered defensive stocks?
Three main sectors in the investment market are termed defensive. These stocks got the term defensive because of the constant and high demand for their products. They also perform better when the market is declining.
The three main sectors are Utilities, Consumer Staples, and Health Care. More defensive stocks include Apartment REITs and Discount Retailers.
What is a defensive stock strategy?
A defensive stock strategy is the regular rebalancing of the portfolio to maintain an intended asset allocation. This has to do with buying short-maturity bonds, and blue-chip stocks of high quality. It also entails placing a stop-loss order and holding cash equivalents in down markets.
