What are defensive stocks – Pros & Cons

<div><img width="1200" height="665" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/What-are-defensive-stocks-1.jpeg" class="attachment-post-thumbnail size-post-thumbnail wp-post-image" alt="What are defensive stocks – Pros &amp; Cons" decoding="async" loading="lazy" /></div><h1><strong>What are defensive stocks – Pros &amp; Cons</strong></h1>
<p><span data-preserver-spaces="true">Defensive stocks are more resilient to bear markets, crises and stock market crashes. Less volatile than the average, these stocks therefore allow your</span><strong><span data-preserver-spaces="true"> stock market portfolio</span></strong><span data-preserver-spaces="true"> to cope with economic downturns by limiting capital losses. They are a kind of safe haven for investors and they offer steady returns.</span></p>
<p><span data-preserver-spaces="true">How to select this type of stocks? There are several types of defensive actions and therefore several criteria that allow them to be identified. </span></p>
<ul>
<li><span data-preserver-spaces="true">High dividend stocks – stocks with high dividend yields</span></li>
</ul>
<p><span data-preserver-spaces="true">A first category of defensive stocks is those whose dividends are high and regular. We’re talking about dividend investing. To spot these stocks, take those that have:</span></p>
<ul>
<li><span data-preserver-spaces="true">Stable or growing profits for several years;</span></li>
<li><span data-preserver-spaces="true">A balanced dividend/profit ratio;</span></li>
<li><span data-preserver-spaces="true">A good yield (ratio between the dividend per share and the share price).</span></li>
</ul>
<p><span data-preserver-spaces="true">In the event of a market decline, if the price of one of these shares falls, its return will become very high. It will therefore become a preferred target for </span><strong><span data-preserver-spaces="true">investor</span></strong><span data-preserver-spaces="true">s with cash to invest. Its price will therefore mechanically recover.</span></p>
<p><span data-preserver-spaces="true">For this to be valid, the company must not reduce its dividend too much during times of crisis. This is why the proportion of profits it pays out must be neither too low (so that the dividend is substantial), nor too high (so that the company can continue to pay a dividend even if its activity slows down). Aim for a dividend/profit ratio of around 50%.</span></p>
<h2><strong>Investing in defensive stocks on the stock market: significant stability</strong></h2>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone wp-image-228851 size-full" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_2358521505.jpg" alt="defensive stocks on the stock market: significant stability" width="1000" height="668" /></span></p>
<p><span data-preserver-spaces="true">The </span><strong><span data-preserver-spaces="true">stock’s volatility</span></strong><span data-preserver-spaces="true"> worries many investors. When economic conditions deteriorate, investors rightly tend to turn to more defensive stocks.</span></p>
<p><span data-preserver-spaces="true">Defensive stocks are stocks that are considered safer and more stable. They may not offer the same earning potential as growth stocks, but they have the advantage of being positioned in sectors essential to the economy, even in times of economic slowdown or crisis.</span></p>
<p><span data-preserver-spaces="true">These sectors are generally consumer staples, utilities like water electricity or healthcare, which perform well in virtually all economic conditions.</span></p>
<p><span data-preserver-spaces="true">For those who want to diversify their portfolio in the defensive stock sector, you can also opt for defensive ETFs. </span></p>
<h2><strong>What are the best defensive stocks on the stock market?</strong></h2>
<p><span data-preserver-spaces="true">We have selected 10 stocks from all the defensive stocks in the world, trying to diversify the geographical sector as well as the sector of activity as much as possible. This is why there are a few European stocks among a majority of </span><strong><span data-preserver-spaces="true">American stocks</span></strong><span data-preserver-spaces="true"> (which are much more numerous).</span></p>
<p><span data-preserver-spaces="true">These are some of the best defensive stocks on the market for investors looking to protect their portfolios from current and future turmoil.</span></p>
<p><span data-preserver-spaces="true">Our selection is based on several criteria such as: <a href="https://www.financebrokerage.com/crucial-trading/">trading</a> volume, liquidity of the security, <a href="https://www.financebrokerage.com/the-impact-of-cheap-oil-balancing-act-in-a-volatile-market/">market</a> capitalization, financial statements, potential of the stock but also popularity among investors. All this while taking into account the geographic and sectoral diversity of the actions.</span></p>
<p><span data-preserver-spaces="true">These criteria are obviously not sufficient to carry out an in-depth analysis of the stock, nor to make a long term investment decision. Always do your own research before investing in a stock, this list is only to give you ideas and examples of values.</span></p>
<p><span data-preserver-spaces="true">The list of the best defensive stocks includes:</span></p>
<ul>
<li><span data-preserver-spaces="true">Walmart (WMT)</span></li>
<li><span data-preserver-spaces="true">Nestle (NESN)</span></li>
<li><span data-preserver-spaces="true">Procter &amp; Gamble (PB)</span></li>
<li><span data-preserver-spaces="true">AbbVie (ABBV)</span></li>
<li><span data-preserver-spaces="true">Costco (COST)</span></li>
<li><span data-preserver-spaces="true">Coca-Cola (KO)</span></li>
<li><span data-preserver-spaces="true">Unilever (ULVR)</span></li>
<li><span data-preserver-spaces="true">L’Oreal (GOLD)</span></li>
<li><span data-preserver-spaces="true">Colgate-Palmolive (CL)</span></li>
</ul>
<p><span data-preserver-spaces="true">This list is given for information purposes, in order to help you discover values and give you ideas. There are indeed many other defensive actions. To find the one that suits you best, complete your research.</span></p>
<h2><strong>The types of defensive stocks</strong></h2>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone wp-image-228849 size-full" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_1888782793.jpg" alt="defensive stocks" width="1000" height="667" /></span></p>
<p><span data-preserver-spaces="true">There are three main categories of companies listed on the stock exchange:</span></p>
<p><span data-preserver-spaces="true">Growth companies, which have growth profiles, adopt strategies to increase their turnover and profits. They are found in particular within the Tech, digital and even e-commerce sectors.</span></p>
<p><span data-preserver-spaces="true">Cyclical companies, whose performances are correlated with the economic cycles of their sectors of activity, are well represented in the automobile, construction and even the oil sectors.</span></p>
<p><span data-preserver-spaces="true">So-called defensive companies are less sensitive to economic conditions and therefore more robust in the event of a deterioration in macroeconomic indicators.</span></p>
<h2><strong>Defensive stock sectors on the stock market</strong></h2>
<p><span data-preserver-spaces="true">A defensive stock is a share of a publicly traded company belonging to an industry sector that is resilient in the event of unfavorable economic conditions.</span></p>
<p><span data-preserver-spaces="true">The principle of a </span><strong><span data-preserver-spaces="true">defensive value</span></strong><span data-preserver-spaces="true"> is therefore to cushion bearish stock market cycles. On the other hand, they will (generally) not capture the same upward amplitudes during favorable economic phases.</span></p>
<p><span data-preserver-spaces="true">Investing in defensive stocks can be considered as investing in the stock market “as a good father”.</span></p>
<h3><strong>The agri-food sector</strong></h3>
<p><span data-preserver-spaces="true">Food production and processing plants upstream of mass distribution are necessary to feed populations. This sector meets a primary need and is therefore an “anti-crisis” sector due to its recurring nature.</span></p>
<h3><strong>The mass distribution sector</strong></h3>
<p><span data-preserver-spaces="true">This sector is by nature defensive, particularly the large food distribution and hygiene products sector. Indeed, it meets the daily primary needs of people.</span></p>
<p><span data-preserver-spaces="true">It is possible to add the distribution of fuels, necessary for the mobility of the majority of vehicles. Be careful, however, it is important to differentiate the distribution of fuels to individuals and companies from the oil sector as a whole (in particular production), which is very cyclical.</span></p>
<h3><strong>The housing sector</strong></h3>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone size-full wp-image-209974" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/07/My-project-1-20.jpg" alt="retainer fee in real estate" width="1024" height="665" /></span></p>
<p><span data-preserver-spaces="true">Although construction (Building and Public Works) as a whole remains a cyclical sector, the housing needs of the population are primary needs. Note, however, that few companies are listed on the</span><strong><span data-preserver-spaces="true"> stock exchange</span></strong><span data-preserver-spaces="true"> in the category of listed real estate companies specializing in rental housing for individuals.</span></p>
<p><span data-preserver-spaces="true">This is explained by the fact that the housing economy is mainly focused on the private market (tenant/owner), as well as transactions between individuals in old real estate. Some companies listed on the stock exchange are present in the real estate development sector for new housing, but the majority of builders are private entities (particularly in France).</span></p>
<p><span data-preserver-spaces="true">Note that this sector of new housing promotion remains cyclical even if it meets a primary need: housing. This can be explained by the correlation between the strength of the economy and the decision to purchase new real estate.</span></p>
<h3><strong>The community services sector</strong></h3>
<p><span data-preserver-spaces="true">Also called “Utilities”, community services include the delivery of electricity, water and even gas, necessary for the needs of millions of homes, companies and industries.</span></p>
<h3><strong>The health sector</strong></h3>
<p><span data-preserver-spaces="true">Health care is also one of the primary needs: taking medications, consultations and medical procedures, but also caring for seniors, are the core business of major defensive stocks in the health sector.</span></p>
<p><span data-preserver-spaces="true">The health sector is therefore defensive provided that certain branches such as biotechnology or research are excluded. Also note that hospitals and clinics are public or private establishments, not listed on the stock exchange.</span></p>
<p><span data-preserver-spaces="true">These five sectors: agri-food, mass distribution, housing, community services, and health are intrinsically defensive because they meet the majority of the primary needs of populations.</span></p>
<p><span data-preserver-spaces="true">However, it is necessary to apply certain filters within the “subsectors”. Thus, as we have seen in the health sector, the </span><strong><span data-preserver-spaces="true">biotechnology sector</span></strong><span data-preserver-spaces="true"> should be excluded from the defensive category.</span></p>
<p><span data-preserver-spaces="true">The same goes for large retailers which offer prestigious wines for sale. This branch of luxury oenology cannot of course be considered as a defensive “sub-sector”.</span></p>
<p><span data-preserver-spaces="true">There are also “second tiers” within the defensive sectors. These are numerous branches of non-essential activity (i.e. they do not satisfy primary needs) but whose consumption can be considered constant, regardless of the economic context. We will think, for example, of the beauty sector or even of vision EssilorLuxottica is a large group manufacturing ophthalmic glasses and lenses that are among the world leaders.</span></p>
<p><span data-preserver-spaces="true">It should also be noted that certain sectors are the opposite of the defensive category, such as luxury boating, or even start-up companies specializing in the design of high-tech products, for example.</span></p>
<h3><strong>The advantages of investing in defensive stocks</strong></h3>
<p><span data-preserver-spaces="true"><img decoding="async" loading="lazy" class="alignnone wp-image-228848 size-full" src="https://6ztkp25f.tinifycdn.com/wp-content/uploads/2023/09/shutterstock_2098588699.jpg" alt="defensive stocks" width="1000" height="667" /></span></p>
<p><span data-preserver-spaces="true">The main advantage of investing in </span><strong><span data-preserver-spaces="true">defensive stocks</span></strong><span data-preserver-spaces="true"> lies in the ability to cushion bearish stock market cycles when economic phases are more complex.</span></p>
<p><span data-preserver-spaces="true">Other advantages of defensive stocks are that they are often companies that are mature in their markets and pay regular dividends.</span></p>
<p><span data-preserver-spaces="true">Also read our article Discover our TOP 15 companies with the highest dividends</span></p>
<p><span data-preserver-spaces="true">The disadvantages of investing in defensive stocks</span></p>
<p><span data-preserver-spaces="true">It is undeniable to say that the performance of defensive stocks is in no way comparable to growth stocks or cyclical stocks during recovery phases. These can offer the investor high returns while defensive values will remain more timid during favorable economic and stock market periods.</span></p>
<p><span data-preserver-spaces="true">The main disadvantage of investing in defensive stocks is therefore to deprive yourself of notable upward performances when the </span><strong><span data-preserver-spaces="true">economic cycle</span></strong><span data-preserver-spaces="true"> is favorable.</span></p>
<p><span data-preserver-spaces="true">The low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market. Unfortunately, many investors abandon defensive stocks out of frustration with underperformance late in a bull market, when they really need them most. After a downturn in the market, investors sometimes rush into defensive stocks, even though it is too late. These failed attempts at market timing using defensive stocks can significantly lower the rate of return for investors.</span></p>
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