Then, set up the portion of your portfolio that each asset class should represent so that your choice of stock will not be a disproportionate amount of the overall scheme. It’s smarter to own a combination of both cyclical and defensive stocks in your portfolio. You’ll be well-positioned to prosper when the economy is growing but also will have some downside protection when the economy contracts. Meanwhile, with demand strong, EPR Properties has returned to growth mode in 2022.
Given the uncertainty, it could be a good idea for long term investors to own a well diversified portfolio of stocks across many different sectors. In this article, we will take a look at 12 best defensive stocks to buy now. If you want to see more of the best defensive stocks to buy, go directly to 5 Best Defensive Stocks to Buy Now. Moreover, let’s say that a stock has a stable history of dividend payments over an extended period of time. Also, let’s assume the stock presently has an attractive dividend yield of 3.5%.
- Berkshire Hathaway’s performance over the last year perfectly exemplifies those characteristics I just mentioned.
- Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it.
- Water, gas, and electric utilities are examples of defensive stocks because people need them during all phases of the business cycle.
In turn, you would reduce—but not eliminate—the amount of loss you might experience in your portfolio if one defensive industry were to decline. That is because not all of these industries will go up or down in price under the same types of economic conditions. The stocks of these companies are non-cyclical and are known as defensive stocks or recession-proof investments. They tend to perform similarly during both economic contractions and expansions. During an expected recession, investors usually add defensive stock to their portfolios, as they are expected to perform well despite the economic downturn.
Johnson & Johnson Stock: Is Now the Time to Sell?
However, if a fund invests in this sub-sector and no others, a decline could result in an outsized decline in the value of your holdings. Choosing defensive stock funds with holdings in a variety of sub-sectors within a given sector can make for less severe losses during a downturn. You can purchase defensive sector mutual funds or ETFs through a brokerage or investment firm. Before you bring these funds into your portfolio, figure out your asset allocation, or how your money will fall into different asset classes like stocks and bonds.
When investors suspect that the economy is headed for a decline, many begin to pad their portfolios with defensive sector funds. This allows them to perform better than the broader market during a market correction or a bear market. An economic downturn might not affect all cyclical stocks the same way. A cyclical stock is one whose underlying business generally follows the economic cycle of expansion and recession.
This travel tailwind should continue to benefit Expedia in 2022 even if the economy slows. Cyclical stocks tend to move up and down in value alongside the market. Additionally, Costco Wholesale Corporation scored a 77 in the Consumer Defensive sector, ranking it higher than 77% of stocks in that sector. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
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- Healthcare is a defensive sector because these companies offer products or services that consumers will still need to buy in hard times.
- Defensive stocks are stocks that generate relatively stable performances regardless of the market cycle.
In particular, their soups and pasta sauces have performed well as people lean towards comfort foods during challenging times. As the company continues to expand both with products and with physical locations, one can only expect more growth in their shares. GE took a hit like most renesource capital forex broker review companies in 2020 but has climbed out of the hole to sit higher than their pre-pandemic share price. For our list of 12 Best Defensive Stocks to Buy Now, we took 12 stocks that have defensive qualities that have outperformed the S&P 500’s decline of 17.5% year to date in 2022.
Consumer staples sector
Although that was down from the prior year, it still represents a very respectable 22.7% of total sales. In other words, almost 23% of all Coca-Cola’s sales goes straight to the company’s net cash pile, before it spends money on dividends, buybacks and debt reduction. Pfizer (PFE, $40.18) is a diversified pharmaceutical 12 open source internet of things iot platforms and tools company that offers medicines and vaccines in a broad spectrum of therapeutic areas. Pfizer has a strong foundation of diverse drugs that produce strong cash flows for its shareholders. More importantly, it has paid a dividend for the last 19 years, including 14 consecutive years of dividend growth.
Should You Invest In Defensive Stocks?
This gives PFE the kind of economies of scale that drug development requires. The company is seeing a nearly 100% share price increase in the last year. Coty is a penny stock, so investors should be aware of potential volatility risk management when purchasing this stock. Portfolio diversity is always helpful for cash flow, especially during a recession. Right now, many people are flocking to Costco to buy their favorite products at discounted prices.
The stocks of these sectors are considered defensive stocks since they outperform the economy during downturns. Well-established companies, such as Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola, are considered defensive stocks. For this reason, defensive stocks are often seen as a type of ‘safe haven asset’ which investors may buy and hold as a way to hedge against portfolio risk. The major difference between cyclical and defensive stocks is that defensive stocks do not follow the cycles of the economy. On the other hand, cyclical stocks are those stocks that tend to do well when the economy is strong and decline when there is an economic downturn. In other words, the term “cyclical stocks” is the opposite of defensives.
For example, the best dividend stocks tend to fall less in bear markets. This works if the market believes the company will maintain the dividend, even while other stocks are tumbling. Apartment real estate investment trusts (REITs) are also deemed defensive, as people always need shelter. When looking for defensive plays, steer clear of REITs that focus on ultra-high-end apartments. Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. Defensive stocks are said to have matured and stable business models irrespective of the changes in the phases of the business cycle.
Why Invest in Defensive Stocks?
Consumer cyclicals are consumer discretionary goods that, unlike consumer staples, aren’t strictly necessary purchases. EPR Properties (EPR 1.02%) is a real estate investment trust (REIT) focused on owning experiential real estate such as movie theaters, ski resorts, eat-and-play locations, and other attractions. However, it’s holding up in 2022 because people still want to enjoy these experiences after having to hold back during the early stages of the pandemic.
Another drawback is that defensive stocks tend to be either in cyclical industries or low-growth arenas that aren’t popular. For example, the company might be profitable, but its earnings or sales growth rate could also be low. In periods of economic decline, defensive stocks are usually overvalued.
Investors seeking to protect their portfolios during a weakening economy or periods of high volatility may increase their exposure to defensive stocks. Well-established companies, such as Procter & Gamble (PG), Johnson & Johnson (JNJ), Philip Morris International (PM), and Coca-Cola (KO), are considered defensive stocks. In addition to strong cash flows, these companies have stable operations with the ability to weather weakening economic conditions. They also pay dividends, which can have the effect of cushioning a stock’s price during a market decline. The stocks of companies like Procter & Gamble, Philip Morris International, Coca-Cola, and Johnson and Johnson are considered defensive stocks.
Its powerful free cash flow is more than sufficient to cover dividends, share repurchases, acquisitions and debt reduction. Last year the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow measure, grew 6.6%. Although its reported earnings per share (EPS) fell to 82 cents from 89 cents, Wendy’s management now forecasts that in 2023 EPS will rise to between 95 cents and $1.00. Given the volatility in the financial sector and with rising interest rates, investors are looking for stocks with defensive qualities. Investing in defensive stocks is a relatively low-risk way to grow your wealth.
RTX aims for a kit fill rate of 90%-95%, but in July 2022 it was just 50%. At the time, Hayes said he expected the rate to rise to 80% by the end of 2023. As such, investors have heard a common refrain from these companies this year. Supply chains persist, and there’s pressure on margins and earnings expectations.
What’s wrong with the sector, and how should investors look at investing in it? Dividend stocks are considered safer than high-growth stocks, because they pay cash dividends, helping to limit their volatility but not eliminating it. So dividend stocks will fluctuate with the market but may not fall as far when the market is depressed. This sort of five percent rule is a yardstick to help investors with diversification and risk management.