Defensive stocks are those types of stocks which are consistently showing stable and predictable earnings irrespective of economic instability. Owners of these companies always get constant dividend and stable earnings.
During a bad economic conditions, generally consumers use to avoid costly items, entertainment, travel or any other luxury items. They only buy necessary things like food, health care and other basic requirements.
Due to constant demand of these products, stocks into these defensive sectors tend to remain stable during various phase of business cycle, especially during recessions. For this reason, shares from these sectors are known as defensive stocks.
As the name suggests, these stocks will defend your portfolio from losses at the time of recession.
To be on safer side, investors are generally advised by experts to invest into these defensive stocks during recession or in case of volatile economic conditions.
Investing into defensive stocks will protect your investments in case of significant declines in share prices.
Examples of Defensive Stocks
There are many sectors which can be classified as defensive. For instance, shares of companies falling into following sectors can be considered as defensive stocks;
- Fast moving consumer goods (FMCG) like companies manufacturing food items like biscuit, milk, cereal, cigarettes, tea, corn, crude oil and rice.
- Health care, Insurance, hospital, medical instrument makers and Pharmaceuticals companies – as people need to go to a doctor and buy medicines in hard times.
- Utility sectors i.e. natural gas, telephone, electricity etc – as consumer generally need utility services such as gas, phone and electricity.
Companies manufacturing Cars or luxury items such as entertainment, travel and high end clothing can’t be considered as a stock from defensive sector as people generally buy car or luxury items, when things are going well, but prefer to postpone when things are tougher.
During high volatility, investors seeking to protect their portfolio can increase their exposure to the defensive sector’s stock.