Introduction
As a newbie investor, you may dilly-dally between investing through traditional bonds or venturing into the equity market. When you look at bonds or fixed deposits, you may have to park your funds for a longer tenure of 10-15 years. With equities, you have the bullish or rising markets and the bearish or falling trends you may have to put up with for the stocks, shares, or commodities you purchase from stock exchange markets.
This is where you may want to look for novel ways of investing and building your portfolios. Investing with structured notes helps you with more streamlined ways of looking at the market and building your wealth-generation prospectives.
You can also aim to invest in defensive stocks. Now, what are defensive stocks? Defensive Stocks refer to shares of companies that produce everyday products. These are daily-use goods or services that people keep buying, no matter what happens in the economy. Think of toothpaste, food, grains, gas, and electricity. You find consumers buying them even during economic downturns or while the economy is contemplating a severe form of recession. These stocks are more stable and can fetch you consistent dividends even during economic downturns. This is because the markets are less volatile to defensive companies’ stocks and shares.
On this parlance, let us have a more realistic overview on how defensive stocks operate and behave inside the market. Helping you get started on the same:
Why are defensive stocks always in demand?
Here is a list of reasons as to why defensive stocks are always in demand. Let us have a rundown into the same:
FMCG products that cater to everyday use
You would want to use the toothpaste to brush every day. You need food grains, lentils, fruits, and veggies to cook your food platters out there inside the kitchen. Plus, you need shampoo and soap to bathe and cleanse yourself every day. These are fast-moving consumer goods or FMCG products that you cannot do without even during a global recession or a severe downturn the economy is facing.
Medications that are in use
To maintain your health, you might need a set of medicines. You have the pharma industry that manufactures over-the-counter pills or antibiotics for viral and bacterial infections you may catch. The polluted atmosphere and thronging at over crowded places are the major reasons for you to catch different kinds of infections. You might have a cold, cough, fever, flu, or even chronic diseases like diabetes or cancer. The pharma industry provides medications and pills for all types of health-related disorders. And, taking medications or pills is mandatory to cure health ailments, and you cannot do without them in economic recession or downturn scenarios.
Utility services that are meant for daily use
You may need a gas connection to use the gas stove that helps you cook dishes for yourself and your family members. Similarly, you need an electricity connection to power up your electrical and electronic devices out there. Electric cookers, lights, fans, electric ovens, computers, television sets, and laptops power up on electricity. Therefore, gas and electricity connection are utility services that people need every day irrepsective of how the economy functions.
What are the common defensive sectors out there?
These are the common defensive stocks that are used across sectors. Let us have a brief rundown into the same:
FMCG Products
Fast Moving Consumer Goods or FMCG products relate to items like grains, wheat, rice, ragi, cereals, cosmetics, soaps, toothbrushes, make-up kits, shampoos, so on and so forth. Unilever, ITC, Ponds, Colgate-Palmolive, and Food companies like MTR or Ashirvad that provide ready-to-use cooking staples among developing economies are major players with respect to the same.
Medications
Procter and Gamble, Johnson and Johnson, and Abbott International Private Ltd are world-known firms that provide health care and wellness products for kids, adults, and children. They manufacture medicines, antibiotics, medicated soaps, rash-free baby talcum powders, and other wellness care products that people buy on a daily use basis.
Gas and electricity suppliers
Indane, Hindustan Gas, Bharat Petroleum, and Shell International provide LPG products like gas, petroleum, and other products you need for daily use. Brands like Duke Energy and Dominion provide electricity supplies to most households across the US and the UK. Hydropower plants in India and Dubai provide electricity to these countries. You have public and private sector undertakings that cater to the above.
Telecommunications
Verizon, Vodafone, and AT&T are telecom providers that supply internet, Wi-fi, and wireless mobile connections to most households across the world. You must contact them to get your phones and laptops powered up.
What are the key features of defensive stocks?
These are the key features that are applicable when you own stocks and shares belonging to defensive cadre firms. Let us find out what they are:
Steady returns of investment
These products are manufactured by firms and used by millions of people who are residing across the globe. Therefore, the demand for these products is always on the higher curve, even during economic recessions or other unprecedented downturns as such. Therefore, shareholders and stockholders can expect steady returns of investment in the form of interest earnings, coupons, or dividend payouts.
Lower Beta levels
You can expect a steady growth of your investment portfolios when you purchase shares or stocks from defensive enterprises. These shares or stocks are prone to fewer market volatilities or swings and the portfolios can grow at the steady and even-paced manner indeed.
Diversified Income Earning Portfolios
Defensive Enterprises issue bonds, stocks, and fixed-income securities of varied denominations. You can create enriched baskets of mixed investments to diversify your income-earning or wealth-generation portfolios on a seamless platter indeed.
Safer investment havens even during economic downturns
Defensive stocks like FMCG products or medical supplies are highly in demand by people even during economic downturns like outbreaks of global pandemics or global recessions. The manufacturing or producing enterprises never stop production levels, and the supply-demand levels are maintained at all times. Therefore, when you invest in defensive stocks or bonds, you can expect your portfolios to remain safe even during unforeseen circumstances.
The Bottom Line
The defensive stocks are highly premiered investment products amongst traditional or conservative segments of investors who expect their investment portfolios to remain stable even while the markets are highly shaky. What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
State some classic examples of stock market consumer staples and healthcare cyclical stocks.
Answer: Unilever soaps, shampoos and beverages, Ponds Beauty products and Skin Care cremes, and Proctor and Gamble Medicines are classic examples of consumer staples that issue shares, debentures and bonds to the general public subscribers that are classic examples of defensive stocks on the whole.
Explain how dividend yields differ for defensive stocks as compared to traditional stocks.
Answer: Defensive stocks are also known as consumer-driven stocks whose dividends and interest rates remain stable even during adverse market conditions like an outbreak of recession or globally unprecedented economic outbreaks like wars or pandemic scenarios like, say, the COVID-19. In a nutshell, the cash flow from what is considered to be defensive stocks can be stable even while the markets turn shaky. The stocks are low beta as their prices remain stable even during market swings as people continue buying daily household items no matter what the economy is.
Can defensive stocks create revenue-building portfolios?
Answer: Defensive stock is a stock that belongs to consumables people use daily. Therefore, the goods or services are manufactured even during distress economic conditions. The defensive stocks also are not non-cyclical stocks whose prices rise or fall during bullish cum bearish scenarios. Therefore, utility companies or major pharmaceutical companies do not suffer excessive losses even during high volatility trading scenarios. You can purchase long-term treasury bills that help you diversify your income portfolios on a compounded basis indeed.
How do bull or bear markets impact the value of stocks in general?
Answer: Prices of stocks rise in bullish markets while stock prices plummet when the markets indicate bearish trends. The market drops with respect to certain household items that include expensive wellness care products. However, industrial enterprises that include food and hygiene products continued to outperform even during 2020, while coronavirus was at its peak.
Describe new trends that happened in the manufacturing sector post-2020.
These stocks pose competition from new stream cader firms for many investors that made steady cash reserves as per nasdaq or dow estimates that reveal whether economic growth in various phases measure slower or faster progress.
The decline in tobacco products by expert estimates also indicates how health-conscious people have become with the outbreak of viruses or pandemic scenarios wherein companies also came up with health care kits to quit smoking or drinking. Therefore, new trends pose risks to certain segments of investors while defensive stocks to protect consumers, like the S&P stocks, remained stable even during economic downturns.
