Defensive Stock definition and meaning Define Defensive Stock

Of course, various supply chain concerns can derail this stock, and inflationary pressures aren’t good. However, on balance, this is a mega-cap stock I think is worth considering during this period of uncertainty right now. Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Altria is behind many of the biggest brands in the space, including Marlboro cigarettes, Black & Mild cigars, and smokeless tobacco products Copenhagen and Skoal. Even if it's "less bad" on Wall Street these days, many investors are still looking for a defensive approach right now.

For example, Microsoft pays a $2.72 per-share annual dividend, up 9.7% over last year, and it's likely to rise a similar amount this year. And over the last 12 months ending Dec. 31, 2022, Microsoft generated $84.3 billion in free cash flow. That more than covered the $19 billion dividend cost, as well as $28 billion in share buybacks.

Beta measures a stock’s volatility in relation to the overall market. Defensive stocks usually come with a low beta because they are less affected by market swings. Mr. Ben Becker is a Senior Analytics Product Specialist at FactSet based in Chicago. In this role, he is responsible for implementing and supporting Analytics clients, specifically in the portfolio analysis and quantitative space. He joined FactSet in 2016 and prior to that, worked on the Transition Team at Robert W. Baird & Co., and led marketing for SmartUQ LLC, a start-up quantitative analytics company. While evaluating tactical sector allocations for 2021, it is important to re-examine the year we just had and how the uncertainty did not benefit defensive names as we’d normally expect.

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GM encompasses the brands Chevrolet, GMC, Buick and Cadillac, among others. The company is committed to developing 30 new electric vehicles across these lines by 2025. Despite past trouble, GM has a solid foundation today and has shown that it is thinking about the future as well — a great combination for any defensive stock. FedEx is synonymous with delivery in the U.S., although it also offers a wide range of business and e-commerce services. It maintains an extensive supply chain that positions the company to thrive in any kind of economic condition. Costco’s financial results for the quarter that ended on Aug. 31 reported that net sales were $70.8 billion, an increase of 15.3% over the same quarter last year.

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• Coca-Cola is one of the most well-known defensive stocks on the market.
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• This defensive stock also has a diverse portfolio that includes some luxury brands and even non-beauty brands.

However, during an economic boom, defensive stocks may not be the best option to include in your portfolio as they’re not likely to perform as well when the overall stock market is climbing higher. These companies produce goods or offer services that consumers will buy regardless of the state of the market or economy. Fundamentals like food, healthcare, and utilities are just a few of the many types of industries a defensive sector fund might invest in.

What Are Defensive Sector Funds?

Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks. Defensive stocks as a group have a higher Sharpe ratio than the stock market as a whole. That is a strong argument that defensive stocks are objectively better investments than other stocks. Warren Buffett also became one of the greatest investors of all-time in part by focusing on defensive stocks.

These stocks are reliable investments that tend to provide a hedge to investors when the market faces volatility or uncertainty. Defensive stocks come with stable dividends and earnings irrespective of the market’s performance. In economic decline, most companies might see temporary drops in revenue. However, defensive stocks are likely to perform better than the overall market. They may maintain their earnings during that time, enabling them to provide returns in the form of dividends. Plus, many investors move towards these stocks in the unfavourable market, which may result in price growth.

It lowers the risk substantially while offering an appropriate reward. Defensive stocks also traditionally come from sectors that produce necessities or consumer staples. Consumers who purchase such goods or services will do so regardless of a recession.

When looking for defensive plays, steer clear of REITs that focus on ultra-high-end apartments. Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. These stocks often outperform the market in economic recessions when most stocks perform badly.

Renewable energy sources like solar panels and wind turbines are also Defensive stocks definitiond. Even in a recession, consumer spending on utilities is less likely to drop, so the value of stocks in this sector remain relatively stable. While defensive stocks can bring many advantages, they also have their drawbacks.

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Fidelity Select Gold Portfolio is an example of a mutual fund that targets gold. This sector includes companies that offer communication services through cellular, fiber-optic, fixed-line, wireless, and high-bandwidth networks. Their businesses follow known patterns through each phase of the economic cycle and thus tend to preserve value as the economy moves into a recession.

These are all consumer essentials that are resilient to economic changes, making Procter & Gamble a good choice for a defensive stock. With the current price closer to the top of the 52-week price range than the bottom, McKesson is currently doing better than many of the other defensive stocks on this list. That also means you might have to wait to see significant returns, but long plays are a wise strategy when you’re riding out a period of economic uncertainty. The mega-cap pharma company provides healthy cash flows which ensures the dividend yield remains substantial. Pfizer is investing around $9 to $10 billion in research and development that will drive its growth in the future. "Sin stocks" like tobacco giant Altria () are some of the best defensive investments you'll find, as consumers hit hard by any downturn tend to rely on them to get through the tough times.

Similar to https://forex-world.net/ , Proctor & Gamble is one of the leading consumer goods plays on the market right now. Again, investors bullish on a steady economic recovery, but unsure as to the rate of growth in the years to come, may want to consider such stocks right now. If that sounds like your preferred strategy, then consider one of these seven defensive stocks that should hang tough even in a bear market. If the stock performs well in a strong economy and poorly in economic decline, it may be a cyclical stock. These stocks usually belong to businesses like automobile manufacturers, airlines, hotels and restaurants, banks, etc. Beta indicates the stock volatility relative to the benchmark index (Nifty 50, Sensex, etc.).

Consumer staples

The key for long-term investors looking at the stock chart of JNJ stock is to look at how this stock fails to swing wildly in any direction. With the economic headwinds originating from the pandemic dissipating of late, investors have been right to take a risk-on approach over the past 2 years. However, now it seems the conversation is once again shifting in a way I haven’t seen since the onset of the pandemic. Concerns about slowing economic growth and new variants threaten the recovery thesis. Additionally, the potential for skyrocketing inflation, rising interest rates and geopolitical tensions to ratchet up, provide investors with a tremendous amount of uncertainty right now.

Defensive stock investments are not guaranteed to maintain their value. Defensive stocks can be popular choices during periods of economic or political turbulence. You will likely hear about them and a defensive investment strategy when financial markets are more volatile and less certain. Shares of major pharmaceutical companies and medical device makers have historically been considered defensive stocks. However, increased competition from new drugs and uncertainty surrounding regulations mean that they aren't as defensive as they once were.

What are examples of defensive investments?

At the same time, just because a stock is in a defensive sector doesn't necessarily make it a defensive stock. It still has to meet some of the other guidelines mentioned above, such as consistently paying out dividends for a long period of time and having an established, sound financial track record. It’s worth noting that investing capital in any asset always incurs a degree of risk.

A smart investment strategy also protects a portfolio, shielding it against financial downturns. 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%. On the other hand, a 2% price gain in the market for one week leads to an expected increase of just 1% for the defensive stock with a beta of 0.5.

Opinions about what percentage of your portfolio you should invest in defensive stocks vary wildly. Ultimately, it’s a personal decision based on your long-term goals and tolerance for risk. 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. Often, these stocks are characterized by stable prices and low volatility.

Moreover, Coca-Cola has been buying back shares over and above the amount it issues to employees. This also helps increase its earnings and dividends on a per share basis. This should still produce enough cash flow to cover its annual dividend of $1.64 per share. For example, analysts project earnings will be $3.40 per share in 2023, which is over twice the dividend payment.

As interest rates rise, investors are beginning to shift toward more defensive stocks. If the stock does not get affected much by market swings, it may be a defensive stock. Such stocks usually belong to companies from the utilities, consumer staples, and healthcare sectors. When defensive stocks are likely to perform well in an economic slowdown, they may perform poorly in an economic boom compared to the overall market. They would not see significant demand growth in an economic boom, which may not enable them to provide great returns.

Procter & Gamble is the parent company for well-known brands such as Gillette, Tide, Charmin, Pampers, Downy, and more. The company represents 65 different brands across several product categories. Their DG Fresh line adds another layer of depth to the business model with fresh product pickup. Although the company has experienced some misfires in the past, they are seeing steady improvements moving forward. However, the company’s reach extends to software, medical, engines, and even energy management. They’re a company with a very long history of success and have proven they can bounce back from even the worst moments in the economy.

However, the converse is also true when the market experiences expansion. They will offer lower returns when compared to cyclical or growth stocks. Pharmaceutical giant Pfizer is another top defensive stock at the moment. PFE stock is currently trading at a price-to-earnings ratio of under 19x and a dividend yield of 3.7%, at the time of writing. You may earn consistent returns by investing in defensive stocks, as some of them regularly pay dividends.