Defensive Stocks Perform Better in Tough Times
First of all, what are defensive stocks? According to Investorwords.com:
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.
From the definition, defensive-type companies refer to those whose businesses do not heavily depend on economic cycles. These companies’ stocks won’t fly when the economy is booming and won’t tumble either when things are slowing down because demands for these companies’ products are stable. Investopedia gives some examples on what are defensive stocks and what aren’t: Car makers are not considered as defensive stocks because people don’t have to buy cars during tough times. However, we all have to eat every day and keep our homes warm even during recession. So food and utilities are defensive stocks as we can put them off.
I own several defensive stocks, all purchased for the purpose of generating dividends in the future. Even though the amount I currently own is rather small and, thus, dividend payouts from these stocks aren’t significant, I am using Dollar Cost Averaging to build my dividend portfolio. Basically, what I am doing is buying a small amount of each stock every month through ComputerShare. The good thing about using ComputerShare to buy dividend paying stocks rather through a regular stock broker is that I don’t pay any commission when making the purchase (I am only buying stocks that don’t have initial set up fee, ongoing automatic purchase fee, and dividend reinvestment fee). That essentially makes DCA possible with as little as $50 a month. With a regular broker, that would be impossible because a fee will be paid for every transaction, no matter how small it is.
|Looking for a cheap stock broker to trade stocks, ETFs, or options? Check out|
As the broad market declined sharply in the past two months (both the Dow and the S&P have lost 10% on November 25th from their peaks reached on October 9th), my defensive stocks are holding up pretty well, even with some moderate growth:
- Altria (MO): October 9 – $69.93, November 26 – $71.08;
- Procter & Gamble (PG): October 9 – $71.08, November 26 – $72.19;
- Progress Energy (PGN): October 9 – $47.29, November 26 – $47.89;
It’s said that defensive stocks are considered as “smart investments during an economic downturn.” Maybe I should increase my positions in these stocks instead of betting heavily on Chinese stocks, only to watch them lose some 30% during the same period.
This article was originally written or modified on . If you enjoyed reading this post, please consider subscribing to my full RSS feed. Or you can also choose to have free daily updates delivered right to your inbox.