Defensive Stocks Perform Better in Tough Times

First of all, what are defensive stocks? According to

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.

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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.

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11 Responses to “Defensive Stocks Perform Better in Tough Times”

  1. The Dividend Guy |  Nov 27, 2007 at 2:46 pm

    I don’ think any stock can be totally defensive. For example the banks have often been considered as defensive plays and some regard them as staples for investment accounts. The key is to realize that just because it is defensive does not mean the price cannot tank, example Citigroup.

    Good post!

    The Dividend Guy

  2. Fiscal Musings |  Nov 27, 2007 at 3:12 pm

    I suppose you could move into these “defensive stocks” and hope to ride out the storm, or you could start purchasing the solid companies whose stock prices are being hammered right now. Since no one can say where the market is truly headed, either play could work.

  3. MoneyNing |  Nov 27, 2007 at 6:15 pm

    Don’t hate the Chinese stocks all of a sudden :) Just remember that they are just at the August level. All US stocks are at January 2007 levels…..

  4. thebaglady |  Nov 28, 2007 at 1:55 am

    My Chinese stocks went down a lot too, but they’re still much higher than what I bought them for. It’s true that overall the American market just didn’t go up much at all.

  5. Super Saver |  Nov 28, 2007 at 10:09 pm


    Great post on defensive stocks. The ones I own are doing fairly well also, enough to keep my total portfolio flat for October and November so far. However, I still have some concern that a recession, hopefully a mild one, will occur in the next 18 months. At that point, I think defensive stocks will also decline, but not as much.

  6. Sun |  Nov 29, 2007 at 12:38 am

    True, nothing is absolutely immune to severe economic downturns. While we have to use electricity, we can use less if we have to tight our belts. I guess defensive or not is relative to other sectors. The trouble of the banks is related to one particular problem, bad loans. If that’s gone, they will rebound. Who knows if the government starts to regulate the utility industry again, those defensive stocks may as well tumble :)

    thebaglady: As people said, you buy Chinese stocks for rewards, not for safety. For higher rewards, there are higher risks. Though the Chinese stocks got hammered lately, if the company has a good, profitable business, the stock will bounce back. After all, Chinese economy is not going to drop from 10+% growth to 1% next year.

    Super Saver: Good to know you can stay flat. To me, all the paper money I made in the past two months is probably gone :( Wish I had a little more these defensive stocks :)

  7. |  Dec 01, 2007 at 12:05 pm

    You definitely chose some good defensive stocks. People will always need the bare necessities even if the economy stinks!