What Are Defensive Stocks?
Defensive stocks are shares in companies whose performance are not highly correlated with the health of the overall economy. In this article, we will provide a detailed answer to the question, “what are defensive stocks”, highlight the different defensive stock sectors and share some of the top defensive stocks to watch!
Table of Contents
What Are Defensive Stocks?
Not to be confused with defence stocks, defensive stocks are shares of companies which perform relatively consistently regardless of the health of the wider economy.
Such companies produce goods or services for which there is constant demand throughout all stages of the economic cycle, allowing them to generate a steady stream of income.
During times of economic turmoil, many investors choose to increase their exposure to defensive stocks in order to protect their capital, as these companies tend to be more resistant to downturns.
Defensive Industries
Understanding the different sectors within which defensive stocks operate can help cement our understanding of what a defensive stock is and can also help identify them.
Below, we have listed a number of different defensive stock sectors, together with explanations as to why they are considered to be defensive industries.
- Healthcare: One of the first defensive industries which will often spring to mind is healthcare, and it is pretty self-explanatory as to why that is. Unfortunately, people will always get sick and, when they do, healthcare and treatments are often required.
- Consumer Staples: This is a broad term which refers to essential goods bought by consumers. The consumer staples industry generally includes products such as food, drink, alcohol, tobacco, household products and personal care products. These are all items which enjoy constant and inelastic demand.
- Utilities: Utilities refers to the services of water and energy providers. Such services are modern day necessities and, although usage may decrease in a prolonged recession, demand should remain fairly stable regardless of the wider economic picture.
- REITs: Real Estate Investment Trusts (REITs) are companies which use investor funds to acquire and manage a portfolio of properties which generate income through rent. Whilst some REITs, such as ones which specialise in apartment buildings, may be considered defensive stocks, others are not. For example, some REITs specialise in office space for businesses or warehouses, both of which could be negatively affected during a recession.
Top Defensive Stocks to Watch
Due to their mostly consistent nature, defensive stocks are often most popular with investors who are more risk averse. However, the stability which they offer can make defensive shares a valuable part of a well-balanced, diversified portfolio.
We know what defensive stocks are and which industries they operate in, but what are some defensive stocks examples? In the following sections, we will highlight 3 of the top defensive stocks to watch.
UnitedHealth Group
UnitedHealth Group is a US health insurance and services company which, in terms of market capitalisation, is the largest healthcare company in the world.
Health insurance is a prime example of a service which, regardless of what is going on in the economy, can rely on constant demand as most people will tend to prioritise paying premiums regardless of what is happening in the wider economy.
In recent history, UnitedHealth has demonstrated its ability to outperform the market in difficult conditions. In 2022, as the wider S&P 500 slumped almost 20%, UnitedHealth’s share price notched a gain of 5.6%.
As with many defensive stocks, UnitedHealth returns capital to shareholders, returning $14.8 billion through dividends and share buybacks in 2023. At the time of writing, the defensive stock has a dividend yield of 1.5%.
PepsiCo
As well as the soft drink which bears its name, PepsiCo owns a range of other food and drink brands, including Mountain Dew, Lay’s, Quaker Foods and Gatorade to name a few.
Whilst none of those items may sound like essential purchases, they fall under the category of consumer staples and their strong brands afford them a certain degree of customer loyalty. Consequently, PesiCo’s sales tend to hold up well during difficult operating conditions.
Again, we can look to the year 2022 for evidence of PepsiCo’s resilience, when share price shook off wider market turbulence to increase by 4%.
Like UnitedHealth, PepsiCo also returns capital to shareholders through dividends and share repurchases, returning over $7.6 billion in 2023. The stock currently offers a dividend yield of 3.1%, and this dividend worthy of a special mention. PepsiCo has increased its annual dividend every year for more than 50 consecutive years, making it a Dividend King.
Walmart
Supermarkets sell all kinds of products that consumers continue to demand come rain or shine. Consequently, they tend to be able to rely on stable sales throughout the economic cycle.
During a downturn, consumers tend to change their habits, eating at home more often and generally becoming more cost-conscious. Both of these behaviour shifts can actually benefit Walmart, which is the largest US supermarket by market share and is renowned for its low prices.
Like PepsiCo, Walmart has an impressive history when it comes to paying dividends. It too has increased its annual payout every year for more than 50 consecutive years, making it a Dividend King as well. At the time of writing, the stock has a dividend yield of 1.1%.
Defensive ETF
Instead of picking individual stocks which operate in defensive industries, investors might choose to invest in an Exchange-Traded Fund (ETF) which focuses on defensive stock sectors.
An example of a defensive ETF is the iShares STOXX Europe 600 Utilities UCITS ETF, which invests in the top European utilities companies.
How to Invest in Defensive Stocks
With an Invest.MT5 account from Admiral Markets, you can buy shares in all the defensive stocks examined in this article and many others! Follow these simple steps to get started:
- Open an Invest.MT5 account and log in to the Dashboard.
- Open the web trading platform.
- Search for a stock or ETF and click the symbol to open a price chart.
- Create a new order, enter the number of shares you want to purchase and click ‘Buy’ to send the order to the market.
Investing with Admiral Markets
With an investing account from Admiral Markets, you can buy thousands of stocks and ETFs from the world’s largest stock exchanges. Click the banner below to find out more about the Invest.MT5 account today:
FAQ
What are some defensive industries?
Healthcare, utilities and consumer staples are all examples of defensive industries.
What are the disadvantages of defensive stocks?
Whilst defensive stocks can outperform the wider market in times of market turmoil, they also tend to miss out on larger gains during bull markets. Consequently, many investors adjust their exposure to defensive stocks depending on the state of the market.
Other Articles You May Find Interesting:
- What Are Cyclical Stocks?
- Investing in Consumer Discretionary Stocks
- Should I Buy Visa or Mastercard Stock?
INFORMATION ABOUT ANALYTICAL MATERIALS:
The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admiral Markets investment firms operating under the Admiral Markets trademark (hereinafter “Admiral Markets”) Before making any investment decisions please pay close attention to the following:
- This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
- Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content.
- With view to protecting the interests of our clients and the objectivity of the Analysis, Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
- The Analysis is prepared by an independent analyst Roberto Rivero, Freelance Contributor (hereinafter "Author") based on personal estimations.
- Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis.
- Any kind of past or modelled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
- Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.
