‌ defensive stock is a stock that provides consistent dividends and stable earnings

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regardless of the state of the overall stock market.

‌There is a constant demand for their products, so defensive stocks tend to be more stable
during the various phases of the business cycle.

‌Defensive stocks should not be confused with defense stocks, which are the stocks of
companies that manufacture things like weapons, ammunition, and fighter jets.

‌ ell-established companies, such as Procter & Gamble, Johnson & Johnson, Philip
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Morris International, and Coca-Cola, are considered defensive stocks.
Defensive stocks in India-
Bharat Electronics, Tata Steel,Infosys Ltd, Hindustan Unilever, TCS, Larsen & Toubro,
Reliance Industries Limited,
Cochin Shipyard, HAL, Mazagon Dock Shipbuilders, and Bharat Dynamics.

‌ efensive stocks offer the substantial benefit of similar long-term gains with lower risk than
D
other stocks.
‌On the downside, the low volatility of defensive stocks often leads to smaller gains during
bull markets and a cycle of mistiming the market.

Defensive stocks are also known as non-cyclical stocks because they are not affected by
the market swings.

Following is the industry list of defensive stocks.

Utilities
Utilities such as water, gas and electricity are basic requirements of livelihood. So, the
demand remains the same at all phases of the economy and thus are least affected from the
market changes. Further utility companies draw benefits at the time of recession as they get
borrowings at lower interest rates with minimal competition.

Consumer Staples
Companies producing or distributing consumer goods usually fall in the category of
defensive stocks. Consumer goods include food, beverages, certain household items,
tobacco, hygiene products, etc. These are day to day use items that have a certain cash flow
at all economic conditions. So, these stocks outperform during weak economic conditions
and under perform during strong economic conditions when compared with cyclical stocks.

Healthcare Stocks
Major pharmaceutical companies and manufacturers of medical devices are considered to
be defensive stocks because medical aid is required irrespective of the economic condition.
But now with increase in competition from new branded and generic drugs these stocks
have become less defensive.

Apartment REITs
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.

Characteristics

1.Sectors that do not go out of fashion

2.Sectors that have perennial demand
3.Attractive dividend yields
4.Large companies with stable business models
5.Conservatively valued in P/E and P/BV terms
6.The business is not exactly cyclical
7.Stocks with low beta as defensive bets
The feature of defensive stocks can be related to its low beta that is generally less than 1.
For example, if the beta of the stock is 0.5, and the market is expected to fall by 10%, then
the defensive stock will fall only by 5% (0.5 x 10%). Similarly, if the market rises by 20%,
then also the defensive stock will rise only by 10% (0.5 x 20%).

Pros Of Defensive Stocks

1. Stability
Defensive stocks belong to the sectors which do not go out of fashion and have stable and
predictable demands, which may enable them to offer steady returns for a long time.
Investors who cannot stomach higher volatility may consider these stocks.

2. Lower risk
Though any investment inherently involves risk, defensive stocks are considered relatively
less risky, as they are less likely to lose their value significantly. Investors who prefer capital
protection over high-risk-high-returns may pick defensive stocks.

3. Outperformance in economic decline

In economic decline, most companies might see temporary drops in revenue. However,
defensive stocks are likely to perform better than the overall market. They may maintain their
earnings during that time, enabling them to provide returns in the form of dividends. Plus,
many investors move towards these stocks in the unfavorable market, which may result in
price growth.

Cons Of Defensive Stocks

1. Lower probability of significant returns

A limitation of defensive stocks in India is that they rarely offer quick and significant returns.
They may help investors protect their wealth but may not help them quickly build wealth.
2. Higher price
If you turn to defensive stocks during an economic slowdown, you may find them high-priced
or overvalued because many investors do the same. High demand results in a price rise,
which may decrease your probable returns from the stock.

3. Underperformance in an economic boom

When defensive stocks are likely to perform well in an economic slowdown, they may
perform poorly in an economic boom compared to the overall market. They would not see
significant demand growth in an economic boom, which may not enable them to provide
great returns.

Role of defensive stock in a portfolio

Every investor wants to protect their investment at the time of recession in the economy or
from the high volatility of the market. This is where the role of defensive stocks comes into
play. A steady and certain return helps the investor to survive during hard economic crashes.
So, as an investor you can consider engaging a certain percentage of your investment
towards defensive stocks which at times acts like a protective shield. Even big companies
which have strong and steady cash flows with a fixed dividend rate for many years can be
considered as defensive stocks. These big, established companies have a certain capacity
to absorb market fluctuation and remain unaffected to market change.

Why Invest in Defensive Stocks?

1.Helps reduce portfolio volatility.
2.Serves as a viable option for less experienced investors3. Provides a steady revenue
stream (through dividends).
3. Provides a steady revenue stream (through dividends).

Practical Example

•The 2020 coronavirus pandemic’s caused substantial volatility with large stock market
drops, causing many investors to panic. While the Dow Jones Industrial Average (DJIA),
S&P 500, and Nasdaq plunge throughout the pandemic, defensive stocks become a safe
haven for fearful investors.

•B&G Foods Inc (BGS) is an example of a defensive stock that’s been able to offer a stable
return on investment during the pandemic. The company manufactures, sells, and distributes
shelf-stable foods, frozen foods, and household products. During the first six months of
2020, the company’s shares rose 36%.