Understanding Defensive Stocks, Pros & Cons, Examples

example of defensive stocks

During an expected recession, investors usually add defensive stock to their portfolios, as they are expected to perform well despite the economic downturn. On the other hand, cyclical stocks mirror the economic cycle by thriving during economic upswings and suffering during a downswing. A defensive stock is one that can be relied on to provide consistent returns even during an economic or market downturn. These companies typically offer goods or services that people continue to buy even when the economy isn’t doing well. Defensive stocks play an important role in any well-rounded investment portfolio.

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As a result, investors can continue to expect that Coca-Cola will keep raising its dividend as it has for the past 60 years straight. That is quite an achievement, and is likely one reason why KO is one of Warren Buffett’s favorite stocks. The famed value investor and CEO of Berkshire Hathaway (BRK.A) has held shares in the company for almost 35 years, since 1988.

How to trade defensive stocks

Investors may increase their exposure to defensive companies to protect their portfolios during extreme volatility or economic weakness. As such, they are considered a good choice for investors who are looking for long term stability rather than high yields. Defensive stocks hold their own during recessions because demand for these businesses’ goods is fairly steady.

example of defensive stocks

When carefully chosen, Graham discovered that further declines in these inexpensive equities were rare. Even when regular smokers’ financial situations deteriorate, they always find a way to get money for tobacco. It creates https://bigbostrade.com/ upwards of 100 new inventions annually for customers in more than 100 countries. In addition, BAE designs, develops, integrates and provides products in areas as diverse as life support and naval combat systems.

Best Consumer Defensive Stocks

For passive investors, dollar cost averaging is beneficial since it relieves them of deciding when and how much to purchase their investments. For instance, it was customary for Graham to invest in stocks where the liquid assets on the balance sheet (net of all debt) exceeded the company’s full market valuation (also known as “net nets” to Graham’s followers). Graham had various other financial ideas, but this was his go-to approach. During recessions, defensive equities frequently outperform the market as a whole. Compared to their cyclical stock counterparts, these investments tend towards more resilience during recessions.

  • Investors are concerned about the financial sector and the economy, but these best defensive stocks have risk-averse traits that can help calm those fears.
  • As investors might expect, each sector has performed better than the broad market through the volatility we’ve seen over the past year.
  • Since its founding in 1837, Procter & Gamble has become one of the world’s largest consumer product manufacturers, generating more than $80 billion in annual sales.

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Features of defensive stocks

On the other hand, defensive stocks are less likely to experience a value decline during a stock market downturn or a recession because their products and services remain continually in demand. A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. Defensive stocks should not be confused with defense stocks, which are the stocks of companies that manufacture https://forex-world.net/ things like weapons, ammunition, and fighter jets. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.

These companies are often at the forefront of many scientific and technological developments, and always have a consistent customer base. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

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Along with its solid base as a pharmacy and retail store, CVS completed its ambitious acquisition of Aetna, an American health insurance company, in 2018. As of the company’s Aug. 3 earnings release for the second quarter of 2022, total revenues were up 11.1% year to date compared to last year. Strong results prompted CVS to increase its earnings-per-share and cash-flow forecasts for the year. CVS is a widespread pharmacy chain with over 9,900 locations in all 50 states plus Washington, D.C., and Puerto Rico. Despite competition from pharmacies in larger retail chains like Walmart, CVS has continued to grow and thrive, with the company’s resilience making it a fantastic defensive stock.

Defensive stocks are also known as noncyclical stocks because they are not highly correlated with the business cycle. Defensive stocks tend to perform better than the broader market during recessions. However, during an expansion phase, they tend to perform below the market. If the market drops 2% in a week, then we would expect the stock to lose only about 1%.

In the end, defensive stocks are just one way to mitigate risk in your portfolio. Most investors will want a diversified strategy that combines them with the right cyclical or growth stocks. Like most things in life, investing is all about finding the right balance. Another characteristic of defensive stocks is their consistent dividend payouts. These stocks often belong to companies that have a long history of distributing dividends to their shareholders, even during challenging economic times.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research. We’d like to share more about how we work and what drives our day-to-day business. And Buffett mentions many times, he has endured many drawdowns of 50% or more during his time with Berkshire. According to Graham and Buffett, getting even an average return, like the S&P 500, is more of an accomplishment than it might appear.

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