Understanding Defensive Stocks, Pros & Cons, Examples (2024)

FAQs

Understanding Defensive Stocks, Pros & Cons, Examples? ›

Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks. On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market.

Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks. On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market.

Defensive stocks are those that tend to provide stable earnings and consistent returns, even during an economic downturn. Shares of well-established companies in the consumer staples, utilities, and healthcare sectors are common examples of defensive stocks.

Long-Term Stability: Such stocks have the potential for long-term stability and steady growth. Their consistent cash flows and resilient business models allow them to endure economic cycles and provide reasonable returns over the long run.

Defensive investing typically involves holding a diversified portfolio of asset classes such as lower-risk cash and bonds, plus equities, along with assets whose performance is typically less correlated to stock market movements – such as gold.

Additionally, Costco Wholesale Corporation scored a 77 in the Consumer Defensive sector, ranking it higher than 77% of stocks in that sector. COST has an Overall Score of 68.

A rating of 72 puts Coca-Cola Co (KO) near the top of the Consumer Defensive sector according to InvestorsObserver. Coca-Cola Co's score of 72 means that it ranks higher than 72% of stocks in the sector. In addition, its overall score of 74 ranks it higher than 74% of all stocks.

As far as defensive stocks are concerned, McDonald's (NYSE:MCD) is a well-loved classic. The company has historically provided a lengthy track record of steady returns, making it a favorite among investors. Its widespread global presence also reduces its vulnerability to fluctuations in the U.S. economy.

How do you tell if a stock is aggressive or defensive? ›

A company stock with beta greater than one is called an aggressive stock. If beta is less than one, the returns on the company stock are less volatile than the market return. A company stock with beta less than one is called a defensive stock.

Defensive stocks are favored by investors during tough economic times as companies operating in the space feel little impact of the broader economic downturn. That's because they sell products and services whose demand remains almost unchanged due to their essential nature.

Companies in the utility industry, for example, are defensive because consumer demand does not decline as much during downturns. Consumers need electricity, water, heating, and air conditioning, whether the economy is in a recession or not. The other primary defensive industries are consumer staples and healthcare.

Always have at least 33% of the portfolio invested in defensive shares.

Bank stocks are near the middle of the risk spectrum. They can be recession-prone and are sensitive to interest rate fluctuations, just to name two major risk factors. But, like most other types of businesses, the risk associated with bank stocks can vary tremendously between companies.

the means used by companies in market leadership positions to defend their market share from attacks by challengers; six common defence strategies are position defence, flanking defence, pre-emptive defence, counter-offensive defence, mobile defence and contraction defence.

There are two main types of defensive strategies that an opposing team can employ: Man-to-man or zone defense. The first is man-to-man. As the name suggests, you, as a defender are responsible for guarding a specific opposing player.

Johnson & Johnson (JNJ Stock)

As a healthcare company, it is considered a defensive stock due to the constant demand for its products and services. Especially during times of economic uncertainty.

Is Home Depot a defensive stock? ›

Home Depot (NYSE:HD) is often characterized as a defensive stock, but the company is working on changing itself and adding more dynamics to the mix through a growing digital ecosystem and shakeups in its business-to-business model.

There are three main defensive sectors: Utilities, Consumer Staples, and Health Care. Utilities: Water, gas, and electric utilities are needed in all phases of the business cycle.

Microsoft $MSFT is a good defensive stock less likely to be affected by economic downturns. It's a well-established company with a strong track record of profitability. $MSFT has a diverse portfolio including operating systems, cloud, gaming, AI, and application software.

Companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. Also includes companies that provide services such as education & training services.

Cyclical stocks are generally the opposite of defensive stocks. Cyclical stocks include discretionary companies, such as Starbucks or Nike, while defensive stocks are staples, such as Campbell Soup.

Defense stocks did well in 2022, enjoying a big rally in October and far outpacing the wider stock market: the MSCI Aerospace & Defense index has seen 18.66% growth in a 12-month period. They could be a good addition to investor portfolios with the current climate.

Moreover, the top defensive stocks have the ability to grow their dividends. Typically, these defensive companies generate a sufficient amount of free cash flow (FCF) that can support both dividend payments and also stock buybacks.

Defensive stocks are considered some of the safest investments in equities. These companies usually promise decent returns over the long term.

Apple (NASDAQ:AAPL) seems to be a stock which, in spite of a premium valuation, exhibits characteristics of a defensive stock. This isn't that surprising, considering the company's consistent profits and generous shareholder returns of dividends and share repurchases.

Grading Defensive Stocks With AAII's A+ Stock Grades

Using AAII's A+ Investor Stock Grades, the following table summarizes the attractiveness of three defensive stocks—Colgate, Kimberly Clark and Procter & Gamble—based on their fundamentals.

What companies are consumer defensive stocks? ›

If the company is generating revenue and has future growth potential, and still the company stocks are plummeting and trading, sometimes as low as its floor, then there's a high chance that the company stocks are being shorted or manipulated.

A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.

Which Stocks Do Best During a War? In general, defense stocks (companies that produce weapons and armaments) tend to fare the best during a wartime environment.

They're less likely to drop in value when there are events that trigger an economic downturn thanks to their steady nature and low volatility. In a recession, defensive stocks can protect you from further losses.

Common stock is a type of tradeable asset, or security, that equates to ownership in a company. If you own common stock in a company, you have the right to vote on things like corporate policies and board of director decisions. Common stock is just one type of stock traded on public exchanges.

Is preferred stock safer than common stock? Yes, preferred stock is less risky than common stock because payments of interest or dividends on preferred stock are required to be paid before any payments to common shareholders. This means that preferred stock is senior to common stock.

A blue chip stock is stock issued by a large, well-established, financially-sound company with an excellent reputation. Normally, such companies have operated for many years, have dependable earnings, and usually pay dividends to investors. A blue chip company typically has a market capitalization in the billions.

What is an example of defensive assets? ›

What are defensive assets? Defensive assets provide long-term stable returns with lower volatility. Examples of defensive assets are fixed interest investment options such as debentures, bonds and bank bills and cash investment options which include bank bills and bank deposits.

The Cyclical super sector has four sectors: Basic Materials, Consumer Cyclical, Financial Services, and Real Estate. The Defensive super sector has three sectors: Consumer Defensive, Healthcare, and Utilities.

The objective of a defensive business strategy is to fend off aggressive attacks. If you don't have a defensive strategy or if you fail to stop an attack, you incur a substantial problem because you put your business at risk.

This sort of five percent rule is a yardstick to help investors with diversification and risk management. Using this strategy, no more than 1/20th of an investor's portfolio would be tied to any single security. This protects against material losses should that single company perform poorly or become insolvent.

The 1% rule demands that traders never risk more than 1% of their total account value on a single trade. In a $10,000 account, that doesn't mean you can only invest $100. It means you shouldn't lose more than $100 on a single trade.

While cash, gold and Treasuries are all considered defensive asset classes, each arrives at that characteristic in a different way. Cash has historically provided stability in the form of very low volatility, along with a lower return.

A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. Well-established companies, such as Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola, are considered defensive stocks.

In general, defensive stocks tend to have a market beta of less than 1, meaning they will outperform the broader market when the index falls. In contrast, cyclical stocks tend to have a market beta of more than 1, meaning they will underperform when the index falls.

PepsiCo, Inc. gets a 89 rank in the Consumer Defensive sector. Consumer Defensive is number 7 out of 11 sectors.

Defense stocks did well in 2022, enjoying a big rally in October and far outpacing the wider stock market: the MSCI Aerospace & Defense index has seen 18.66% growth in a 12-month period. They could be a good addition to investor portfolios with the current climate.

What is the best defensive stocks? ›

Historically, defense stocks have performed well during conflicts, even when the stock market experiences large amounts of volatility and losses. The U.S. aerospace and defense sector is one of the largest in global infrastructure and manufacturing activities.

Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it. So dividend stocks will fluctuate with the market but may not fall as far when the market is depressed.