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Defensive stocks are shares of a company that provide stability during economic downturns.
- Defensive stocks are considered safer investments and provide stability no matter what the wider stock market is doing.
- Low volatility associated with defensive stocks can lead to small, but consistent gains.
- Defensive stocks can be found in a few stock market sectors including: consumer staples, utilities, and healthcare.
What are defensive stocks?
Defensive stocks are shares of a company that provides stability no matter what the wider stock market is doing. They belong to companies that have consistent demand for their products and provide stable dividend yields and earnings. A defensive stock’s share price usually remains unaffected during economic downturns and periods of high volatility.
Due to their track record of stability, defensive stocks are sometimes referred to as ‘safe havens.’ They can be used as a hedge against portfolio risk during recessions or stock market crashes. Defensive stocks provide stability because they belong to sectors where demand for products remains consistent in all economic conditions.
Defensive stock sectors
Defensive stocks belong to a select few sectors and some of the worlds best known companies fall under these industries. Below are some examples of defensive stock sectors.
Pharmaceutical companies and medical device makers are considered defensive stocks. People will always be sick and the healthcare sector is responsible for developing new drugs, vaccines, medical equipment, treatments, and research. Some examples of defensive healthcare stocks are: Johnson & Johnson, Pfizer, and GlaxoSmithKlein.
Businesses operating in the consumer staples industry sell products that are ‘essential’ to everybody. Supermarkets, food producers, beverages, household and personal care, and tobacco companies are all good examples of consumer staples. Some examples of defensive consumer staple stocks include Walmart, Unilever, and British American Tobacco.
The utilities sector is made up of companies that provide services that are essential for living. Water, gas, and electricity supply are all examples of essential services and stocks within this industry are generally stable in all market conditions. SOme examples of defensive utilities stocks include General Electric, NextEra Energy, and National Grid PLC.
Pros and cons of defensive stocks
Defensive stocks have their advantages and disadvantages. The stability and consistency they provide during difficult economic conditions is their top advantage over other types of stocks. However, the slow growth they generate can leave them lacking when markets are in highly bullish cycles.
Where can I learn more?
For more information about defensive stocks, and other key financial concepts, check out our full course page. To learn more about investing, our helpful courses will take you through everything you need to know.
Fact-checking & references
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