A defensive stock provides consistent dividends and stable earnings regardless of the overall state of the stock market. There’s a Luno exchange review constant demand for these companies’ products so they tend to be more stable during the various phases of the business cycle. Understanding which sectors have historically outperformed in each phase, a market participant might identify which sectors align with their own economic outlook and change their sector views accordingly. One well-known example of a defensive stock operating in the consumer staples sector is the Procter & Gamble Company (P&G). It is a multinational consumer goods corporation headquartered in Cincinnati, Ohio, United States.
- An added perk is its higher dividend yield than the S&P 500 Index — even during a recession.
- Their defensive stock etf had an expense ratio of 0.55% and was listed on the New York Stock Exchange (NYSE).
- Depending on investing style and risk appetite, investor would or would not want to invest in these stocks.
- In the utility industry, they are often bound by more regulations than other businesses.
- Apartment real estate investment trusts (REITs) are also deemed to be defensive because people always need shelter but steer clear of REITs that focus on ultra-high-end apartments when you’re looking for defensive plays.
- Finance Strategists has an advertising relationship with some of the companies included on this website.
Characteristics of Defensive Stocks
Finally, investors should consider industry trends when selecting defensive stocks. Certain industries, such as healthcare or utilities, may be more stable and less prone to economic fluctuations. Defensive stocks are typically found in non-cyclical industries that offer products and services that are in constant demand, regardless of the economic climate. Examples of non-cyclical industries include consumer staples, healthcare, utilities, and telecommunications.
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While we cover a range of products, our comparison may not include every product or provider in the market. Always confirm important product information with the relevant provider and read the relevant disclosure documents and terms and conditions before making a decision. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. Confirming our intuition, Exhibit 4 shows that among large-, mid- and small-cap sectors, Information Technology had the lowest percentage of domestic sales. There were some variations across the cap range; for example, large- and mid-cap Financials had a greater domestic exposure compared to small caps, while mid-cap Energy and Materials had relatively greater domestic exposure. The CFPB has worked closely with states in the last few years to ensure they have the information and support they need to carry out their duties and enforce the law.
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Historical performance
Key areas to watch include tariffs and the strength or weakness of the US dollar. Regarding tariffs, most consumer staples products are made in the US, so direct effects of tariffs might be limited. Products like alcohol from Mexico and items with Chinese components (e.g., packaging and small appliances sold by consumer staples retailers) could see price increases. On the bright side, I believe that after living through changing tariff policy in recent years, consumer staples businesses may be better prepared for tariffs now.
The healthcare sector is another defensive area that remains resilient even during economic downturns. Demand for healthcare services, pharmaceuticals, and medical products remains relatively stable. These companies generate steady cash flow and predictable earnings during both strong and weak economies. Their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies while underperforming them in strong economies. Investors sometimes rush into defensive stocks after a downturn in the market even though it’s too late. These failed attempts at market timing using defensive stocks can significantly lower the rate of return for investors.
While these stocks may offer more stability and protection during downturns, they may not experience the same rapid growth as companies in more volatile sectors. Companies in this sector, such as Johnson & Johnson, Pfizer, and Merck, often exhibit defensive qualities due to their steady revenue streams and essential products or services. Examples of defensive stocks in this sector include well-established brands like Procter & Gamble, Coca-Cola, and Colgate-Palmolive.
Defensive stocks are equities of companies that exhibit resilience and stability during economic downturns, offering stable earnings and reliable returns. Such defensive companies typically belong to sectors such as utilities, healthcare, and consumer staples. They provide essential products and services that consumers continue to demand irrespective of prevailing economic conditions. Defensive stocks refer to shares of companies that https://www.forex-world.net/ are considered resilient during economic downturns. These companies are able to generate stable revenue or earnings even in adverse economic circumstances. In general, they also provide reliable returns to investors (in terms of stock price appreciation) irrespective of the economic cycle.
- Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower.
- Census, about 47% of U.S. households heat their homes with gas.1 Given the polar vortex sweeping through the U.S., heating oil futures prices are being bid up.
- Moreover, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
- Another characteristic of defensive stocks is their consistent dividend payouts.
- It is to be noted that some analysts still consider telecommunications services as defensive companies.
- This may be because 2020 was anything but normal but may also indicate a larger shift to markets.
- These companies have strong cash flows and stable operations with the ability to weather weakening economic conditions.
This is because they belong to sectors where there is a constant demand for products, including food and beverages, utilities, and healthcare services. These types of products don’t usually see a major change in demand throughout the year and are said to have “inelasticity of demand”, which means that if their price changes, it won’t significantly impact demand. A defensive stock refers to a company that tends to outperform the share market in periods of economic downturn. A defensive stock can provide a stable dividend yield, earnings and cash flow, regardless of external events that are happening. Its share price Direct listing vs ipo remains mostly unaffected by high volatility or economic uncertainty. This financial stability allows them to weather economic challenges more effectively than companies with more variable revenue streams.
S&P Dow Jones Indices
Defensive stock refers to the shares of a company that show very little volatility irrespective of the movement of the market. These stocks do not get affected by economic cycles; therefore, they are also referred to as non-cyclical stocks. Many investors choose to add defensive stocks to their portfolio in order to offset the potential risks of other more growth-based investments. However, remember that all investments come with risk and no stock is guaranteed to turnover profits, no matter how stable they appear to be. Companies in the utility industry, for example, are defensive because consumer demand does not decline as much during downturns.
