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What are defensive stocks?

Defensive stocks definition

A stock is considered to be defensive when the company is able to pay out dividends consistently and remain largely unaffected by market volatility. This stability is usually due to the company’s business model, the products and services it sells, and the strength of its brand.

Looking at a defensive stocks list, many tend to be grouped together in the “consumer staples”, “utilities” or “healthcare” categories. Companies operating within these industries typically sell products and services that people will use regardless of external circumstances. As a result, these companies are able to provide relatively consistent growth over time, while remaining largely unaffected by market volatility.

Defensive stocks examples often include Coca-Cola (KO), Johnson & Johnson (JNJ), McDonald’s (MCD), Caterpillar (CAT), Pfizer (PFE), Procter & Gamble (PG) and Costco Wholesale (COST).

But what constitutes a defensive stock may change over time.

Where have you heard of defensive stocks?

Defensive stocks can be popular choices during periods of economic or political turbulence. You will likely hear about them and a defensive investment strategy when financial markets are more volatile and less certain.

Investors tend to fluctuate between defensive stocks and growth stocks when the market is either risk-off or risk-on. During periods of extreme volatility or market instability, investors move towards defensive stocks to protect their net worth and provide cash flow in the form of dividends.

What do you need to know about defensive stocks?

Defensive stocks offer a hedge against market volatility - they typically provide smaller returns during a market uptrend than growth stocks. These companies enjoy slow and steady growth throughout the year.

Defensive stocks could appeal to investors unwilling to tolerate much risk, like older investors and individuals with a significant net worth seeking to maintain their wealth.

If you’re investing in defensive shares, it’s important to manage your expectations. It’s easy for investors to be impressed by the growth of companies like Tesla (TSLA) or Fiverr (FVRR). Investors might be tempted to sell their defensive stocks in search of larger returns. But investors in defensive stocks are less likely to be exposed to the higher risk associated with growth stocks.

It’s worth noting that investing capital in any asset always incurs a degree of risk. There’s no such thing as a risk-free investment. An asset’s past performance is no guarantee of future returns. Defensive stock investments are not guaranteed to maintain their value. You should always do your own research before investing. And never invest money you cannot afford to lose.

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