What are defensive stocks? A defensive stock is a stock that tends to remain stable under difficult economic conditions. Defensive stocks include food, tobacco, oil, and utilities. A defensive stock is a...
A defensive stock is a stock that tends to remain stable under difficult economic conditions. Defensive stocks include food, tobacco, oil, and utilities. These stocks hold up in hard times because demand does not decrease as dramatically as it may in other sectors. Defensive stocks tend to lag behind the rest of the market during economic expansion because demand does not increase as dramatically in an upswing.
A defensive stock should not be confused with a "defense stock" (stock from a company in the defense industry; for example: ammunition, fighter jets, and weaponry.
Another name for a defensive stock is a non-cyclical stock. These stocks can be counted on to stay fairly even, and therefore, they are a good addition to a conservative portfolio. Those nearing retirement might consider moving some of their assets to non-cyclical stocks.
Utility stocks are considered defensive or non-cyclical because people need electricity and gas during all phases of the economy. Healthcare stocks are also considered defensive because people continue to visit doctors and hospitals and buy medicine and healthcare supplies even during a recession.
In fact, defensive stocks tend to do slightly better during economic downturns because investors want to move their money away from cyclical stocks (such as housing-related industries, luxury items, steel, and automotive) and put it where it will be safer (in the old tried-and-true industries mentioned above.
Some investors say that defensive stocks have "semi-bond" or "dead" status because they are considered so safe. They are great for balancing out a portfolio that is growth-stock heavy.
If you're looking for a stock that can weather through any market conditions, defensive stocks are for you. You can buy them and hold them and not worry about timing (like you'd have to for cyclical stocks). But don't expect amazing returns. Some defensive stocks will offer dividends, though, which can be a definite plus.
