E Defensive Stocks - What Are They And Why They Could Play An Important Role In Your Stock Market Portfolio

Defensive or non-cyclical stocks are stocks which are not highly correlated with the business cycles, have in general low volatility expressed as a low beta, and many times pay a dividend. A broader definition for defensive stocks is that they are stocks with relatively stable earnings, performing well mostly in periods of economic contraction or recessions. It is important to mention that defensive sectors are healthcare, utilities, and consumer staples. Commodities are another sector which can be considered a defensive sector including commodity goods such as coffee, oil, sugar.

One of the most important features about defensive stocks is that the tend to outperform in economic downturns and underperform in business cycles such as expansion. They are stocks of companies providing goods and services considered necessary on a daily basis, and therefore are the least likely to get influenced by changes in consumer spending habits in times of economic recessions. They tend to have stable earnings, and can play an important role in any well-diversified portfolio for the following reasons:

  • They offer low volatility, in general they have a low beta
  • They offer many times a dividend, and can generate income for the portfolio
  • They tend to be value stocks having a reasonable growth for revenue
  • They can mitigate the total risk of the portfolio measured by the standard deviation of return
  • Institutional investors such as mutual funds include them in their portfolios, providing support in times of economic crisis and a potential for price appreciation
  • They are suitable stocks for investors with low risk-tolerance and can help to define the desired mix of asset allocation within a portfolio based on the expectations of risk and return. They can play an important role in the diversification of the portfolio.

A defensive stock is not a stock of a company having recently filed for an IPO but are well-established companies with a long history. It is not hard to find defensive stocks using a stock screener. Some basic characteristics are:

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I have no positions in any stocks mentioned.

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