What are defensive stocks? They are stocks that are safe in a bear market. When we play a sport defensively, we play it safe. The same applies to the stock market. During economic uncertainty, investors seek out safe and defensive stocks. During a bear market, they offer modest gains in capital and dividends.
In today’s market conditions, they might be an interesting option. Market volatility remains a constant risk until the markets recover from the war between Russia and Ukraine and chain supply issues. Defensive stocks are also welcomed during periods of high inflation. I believe they should be considered for the remainder of this year. In this article, we will look at their characteristics and give a few examples of stocks and ETFs to look for.
Table of Contents
Defensive Stocks Introduction
As we established earlier, defensive stocks have certain qualities that make them an interesting investment during uncertain times. What are these qualities?
First, defensive stocks provide safety in their demand and earnings when other stocks struggle. During a recession or a period of high inflation, demand remains constant. In turn, this doesn’t negatively impact quarterly earnings. With declining sales and below-average earnings performance, other stocks will struggle to keep their investors on the boat.
Defensive stocks will keep growing modestly. However, when the economy returns to normal, they underperform major indexes. It is wise to allocate funds accordingly during economic growth and uncertainty periods.
Second, defensive stocks are known to provide reliable dividends. Investors can rely on quarterly cash or DRIP distributions in their pockets. In some cases, when the results are better than anticipated, dividends can be increased. Now, let’s talk specifics. Which stocks are considered defensive?
Defensive Sectors
The stock market contains 11 sectors. However, not every sector is considered defensive. For example, if we look at the tech sector, it underperforms during times of economic uncertainty. This year is a great example.
Few people will purchase the latest gadget or the new iPhone 13 Pro Max. During this period, defensive stocks have constant demand. They are also called noncyclical because they are often unrelated to business cycles. Defensive sectors include the following.
1. Utilities
Utility stocks are needed year-round, independent of weather, inflation, or wars. They include water, gas, electricity, and gas.
Consumer Staples: Consumer staples are household items needed year-round. Good examples are food, hygiene products, beverages, and most things in a house.
2. Healthcare
Health is one of the most important factors determining our quality of life. Hence, pharmaceutical products and medical equipment are constantly in demand during economic uncertainty.
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Utility Stocks
1. Duke Energy (NYSE: DUK)
Duke Energy is an electricity and gas producer in the US that provides its services to over 7M Americans across North Carolina, South Carolina, Florida, Indiana, Ohio, and Kentucky. The company generates its resources from coal, natural gas, oil, and nuclear power. Transitioning to renewable energies would probably slash some costs and benefit the environment. Revenues have been steadily increasing over the last decade. With a 3.70% annual dividend yield, Duke Energy is a good investment when searching for defensive stocks.
2. Brookfield Infrastructures (NYSE: BIP)
BIP acquires and manages assets in different industries. It builds its portfolio and rewards its investors based on performance. BIP’s infrastructures include utilities, transportation, energy, and other types of infrastructures. Historically, its acquisitions have paid up both to the company and investors. As a result, its 3.80% dividend yield is a solid payday for investors.
3. American Water Works (NYSE: AWK)
The final stock in this section operates in water distribution and wastewater. It’s the largest public company in its field. It provides water to homeowners and the military. This translates to over 14M people across 24 states. It is investing in expanding its operations, which might explain its poor performance YTD. AWK’s dividend yield is also lower than the other stocks in this section at only 1.76%.
Consumer Staples Stocks
1. Proctor & Gamble (NYSE: PG)
PG is the perfect defensive stock. It sells virtually everything in an American household, such as laundry detergent, hygiene products, diapers, tissues, razor blades, and many more.
The main benefit is PG doesn’t need to own any infrastructure to distribute its products. Stores like Walmart and Costco want PG’s products on their shelves because they sell well year-round. Furthermore, it has a very respectable annual dividend yield of 2.57%.
2. Costco (NASDAQ: COST)
If you want to buy in bulk or astronomical sizes, shop at Costco. The company operates in the US, Canada, Mexico, Japan, the UK, South Korea, Taiwan, Australia, Spain, China, France, and Iceland for 828 stores. Virtually anything can be bought at Costco. Its revenue also grew almost 14% YoY, which is impressive for a defensive stock. Lastly, Costco’s annual dividend yield is only 0.75%, but its growth complements a small dividend distribution.
3. Walmart (NYSE: WMT)
According to Fortune, Walmart is the world’s largest employer—no wonder, with over 10,000 stores across 24 countries and an excellent e-commerce website. Walmart is reliable and provides essential goods for everyone. Its 1.80% dividend yield is also respectable.
Healthcare Stocks
1. McKesson (NYSE: MCK)
Since 2018, McKesson’s growth has been impressive. This year is no exception. Its healthcare supply management seems unphased, unlike other industries. It also supplies specialty care, pharmacy products and biopharma support. McKesson is a well-diversified healthcare stock that has more room to grow. Its growth more than justifies its slim 0.58% dividend yield.
2. CVS Health (NYSE: CVS)
CVS is an American pharmacy chain that operates almost 10,000 locations across 49 states, including DC and Puerto Rico. Despite the competition from big retailers such as Walmart, CVS continued its growth through acquisitions and resilience. Its growth is much more modest, but its dividend is stronger at 2.31%.
Best Trading Companies
Defensive ETFs
Many ETFs can suit customers looking for a defensive approach during an economic slowdown. They incorporate the stocks and sectors we mentioned today and other riskier assets. As a result, asset managers have no shortage of stocks to choose from. Small/mid/large-cap stocks can all fit into the defensive description. ETFs also distribute dividends in cash or as a DRIP.
1. Vanguard Consumer Staples (NYSEARCA: VDC)
Vanguard’s ETF comprises 103 consumer staples stocks. Top holdings are PG, Coca-Cola, Pepsi, Costco, Walmart, and cigarette companies.
2. Invesco S&P 500 (NYSEARCA: SPLV)
Invesco’s ETF tracks the least volatile companies in the S&P 500. Its top holdings include J&J, Verizon, Pepsi, Coca-Cola, and Hershey. Utilities, consumer staples, and healthcare are almost 66% of the fund.
3. JPMorgan US Value (NYSEARCA: JVAL)
JPMorgan’s top holdings include a mix of tech, consumer staples, and health stocks. It’s an interesting mix since tech stocks don’t perform well compared to defensive stocks during a bear market.
Final Thoughts: Defensive Stocks
To conclude, defensive stocks are a great option during times of economic uncertainty. The stock market usually performs poorly, and defensive stocks become a viable option due to their stable demand and dividend distributions. During a bull market, defensive stocks usually underperform their peers.
The main defensive sectors are utilities, consumer staples, and healthcare. Consumers require these goods and services daily as they are essential to everyday life. So when times are hard, forget growth stocks and focus on reliable defensive stocks.
