Defensive stocks can withstand economic recessions by providing critical human services. Finding defensive stocks is easy by using Ben Graham’s timeless rules for the defensive investor. Find out exactly how to find the best defensive stocks and ETFs for your portfolio.
Defensive stocks are companies that provide essential products and services regardless of the economic climate and can be a valuable part of any investor’s portfolio. There is no such thing as a risk-free investment, but some stocks are better bets than others in times of market volatility.
When the market turns for the worse, defensive stocks tend to hold their value better than other investments. This makes them a wise choice for investors who want to protect their portfolios from short-term declines.
There are several factors to consider when choosing defensive stocks. The most important is whether or not the company provides an essential product or service that people will continue to need regardless of the economy. Another key consideration is the company’s financial stability; you want to invest in companies that are likely to remain profitable even during tough times.
Health care, food, and other basic needs are always in demand, so companies that provide these products and services are typically good defensive stocks. Utilities, transportation, and other essential infrastructure companies are often defensive stocks.
While there’s no such thing as a guaranteed investment, choosing defensive stocks can help you weather market volatility and protect your portfolio from short-term declines. When selecting defensive stocks for your portfolio, look for companies that provide essential products and services and have strong financial stability. These companies will be better able to weather tough economic times and continue to generate profits even when the market is down.
What are defensive stocks?
A defensive stock is less volatile and holds its value better in times of market turbulence. Defensive stocks are companies that provide essential products or services, regardless of the economic climate. They are often utilities, transportation, or other essential infrastructure companies.
What are the Pros & Cons of Defensive stocks?
Defensive Stocks Pros:
- Defensive stocks are less volatile than other types of stocks, making them a safer investment for some investors.
- They offer stability and dividends, even in difficult economic times.
- They are less volatile than other types of stocks, making them a safer investment for some investors.
Defensive Stocks Cons:
- Defensive stocks offer lower potential returns than cyclical stocks.
- They may not be as growth-oriented as other types of stocks.
- They may not be as volatile as other types of stocks, making them a safer investment for some investors.
Examples of defensive stocks
Some examples of defensive stocks include healthcare, food, utilities, transportation, and other essential infrastructure companies. These companies are less volatile and hold their value better in times of market turbulence. They are often essential products or services that people will continue to need regardless of the economy.
A list of popular defensive stocks per market sector
Popular defensive stocks include Johnson & Johnson, Pfizer, Merck, Hershey, Kraft Heinz, General Mills, Duke Energy, Southern Company, and American International Group (AIG). For the full list, see below.
- Healthcare: Johnson & Johnson, Pfizer, Merck
- Food: Hershey, Kraft Heinz, General Mills
- Utilities: Duke Energy, Southern Company, American Electric Power
- Transportation: FedEx, UPS, CSX
- Consumer Staples: Coca-Cola, PepsiCo, Procter & Gamble
- Telecommunications: AT&T, Verizon, Sprint
- Materials: Dupont, DowDuPont, 3M
- Industrials: General Electric, United Technologies, Honeywell
- Bank: JP Morgan Chase, Bank of America, Citigroup
- Real Estate Investment Trust (REIT): Simon Property Group, Prologis, Public Storage
- Insurance: Berkshire Hathaway, American International Group (AIG), Metlife
- Technology: Apple, Microsoft, Amazon
Should I buy defensive stocks?
It depends on your risk tolerance and investment goals. Defensive stocks are less volatile than other types of stocks, making them a safer investment for some investors. However, they offer lower potential returns than cyclical stocks. It’s important to weigh each option’s pros and cons before deciding.
What financial criteria are used to find defensive stocks?
The most common financial criteria for defensive stocks are low volatility and high dividends. Defensive stocks are less volatile than other types of stocks, making them a safer investment for some investors. They also offer high dividends, providing a steady income stream even in difficult economic times.
How to invest in defensive stocks?
There are two ways to invest in defensive stocks: you can invest in defensive stock ETFs or buy defensive stocks that pay dividends and have low volatility.
Defensive stock ETFs
Defensive stock ETFs are great ways to build a portfolio during economic downturns. ETFs, offer built-in diversification and lower costs than traditional mutual funds.
The advantages to investing in defensive stock ETFs
1. They offer stability and dividends, even in difficult economic times.
2. They are less volatile than other types of stocks, making them a safer investment for some investors.
3. They can provide a steady income stream even during bear markets.
4. They are a relatively safe investment option.
Disadvantages of Defensive Stock ETFs
1. They offer lower potential returns than cyclical stocks.
2. They can be less exciting to invest in than growth stocks.
3. They may not perform as well as other types of stocks during bull markets.
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Defensive Stock ETFs
SPDR S&P Dividend ETF (SDY)
This fund aims to generate positive returns while still investing in high-yield dividends. To do this, it generally invests 80% or more of its total assets into securities that comprise the index – which measures performance based on how well they follow through with increasing annual dividends every year for 20 consecutive years!
|SPDR S&P Dividend ETF (SDY)||U.S. Equity|
|Net Assets ($M USD)||$20,504|
|Average Volume (3m)||627,378|
iShares Select Dividend ETF (DVY)
Investing wisely is all about balance. If you want a reliable return on your money with some upside potential, then defensive investments like dividend stocks might be what’s best suited for you! The iShares Select Dividend ETF (DVY) offers high-quality shares from 100 companies that have delivered annual payments back into investor pockets over time. These assets need proof of five years’ worth of uninterrupted payouts before being included in this fund’s portfolio.
|iShares Select Dividend ETF (DVY)||U.S. Equity|
|Net Assets ($M USD)||$21,251|
|Average Volume (3m)||1,141,132|
Vanguard Utilities ETF (VPU)
Is it heavily invested in the stock market? This fund uses an indexing investment approach designed to track the performance of large, mid-size, and small U.S companies within the utility sector as classified under the Global Industry Classification Standard(GICS). It attempts to replicate the target index by investing all or substantially all its assets into stocks that make up this particular collection – holding each one at about equal proportions like their weightings within it; non-diversified means there isn’t any protection against bad times if others are doing well.
|Vanguard Utilities ETF (VPU)||Sector Equity|
|Net Assets ($M USD)||$7,271|
|Average Volume (3m)||323,329|
Vanguard Dividend Appreciation (VIG)
VIG’s top holdings include some of the most stable and profitable companies in America, like healthcare giant Johnson & Johnson (JNJ). This ETF has been around for nearly ten years with dividend-paying stocks that have delivered higher profits over time. With every industry under attack, from rising interest rates to trade wars/increased taxes on products, this fund offers you ways to invest safely in tried ‘n’ true winners while also accessing growth through defensive plays.
|Vanguard Dividend Appreciation (VIG)||U.S. Equity|
|Net Assets ($M USD)||$70,809|
|Average Volume (3m)||1,718,166|
How to find defensive stocks?
Using the criteria developed by legendary investor Benjamin Graham, you can use a stock screener to find the best defensive stocks. Graham’s book was published in 1972, so we have updated the following criteria for the present day.
In his book “The Intelligent Investor,” Benjamin Graham lays down the following rules.
Graham’s 7 Criteria for Good Defensive Stocks
Criteria 1. Adequate size of the enterprise
Graham suggested we should use $100 million and the minimum market capitalization for a company, but now it makes sense to use $1 billion.
Criteria 2. Sufficiently strong financial condition
Ben Graham suggested that a 2:1 current ratio should be used to ensure a company has twice the current assets to current liabilities. This Ratio should help a company weather the storm of a bad business climate.
Our screener will use 1.8:1, as 2:1 is a little too restrictive in the current modern stock market.
Criteria 3. Earnings stability
Graham vaguely suggested the company should have “some earning for the common stock in each of the past ten years.”
Criteria 4. Dividend record
“Uninterrupted payments for at least the past 20 years” was Graham’s recommendation for a good dividend record. In our screener, we will go one better with consecutive dividend growth for the past five years.
Criteria 5. Earnings Growth
Ben Graham suggested a company needs a minimum increase of at least 30% in earnings per share over the last ten years. We can use the criteria EPS greater than 3% every year for the last ten years.
Criteria 6. Moderate price/earnings ratio
Ben Graham recommends that the P/E Ratio should be less than 15; this has since become the gold standard for investors. In our screening, we will use a PE ratio of less than 20; otherwise, the screener becomes too restrictive.
Criteria 7. Moderate Ratio of price to assets
The current price should not be more than 2.5 times the book value, according to Martin Zweig’s updated guidance in the intelligent Investor (Page 374). In our defensive stock screener using Stock Rover, we can go one better and use a Price/Book Ratio of 2.5 or use the Price to Graham Number of Less than 1.
Finding Defensive Stocks With Stock Rover
Using award-winning Stock Rover, our favorite stock screening and research tool, you can create the ultimate defensive stock screening strategy. Simply sign up for Stock Rover and import this Ben Graham Stock Screener. Download the Ben Graham stock screener import file now.
Implementing the Defensive Stocks Screener Strategy
Using Stock Rover to implement the Ben Graham defensive stocks strategy, the screening criteria look like the screenshot below.
The Best Defensive Stocks for 2022 According to Ben Graham
Here we have the results of the defensive stock screener, including companies Nucor, Steel Dynamics, Reliance Steel & Aluminum, Westlake, Avnet and Worthington Industries.
|Ticker||Company||2-Year Return vs. S&P 500||Market Cap ($M USD)||Current Ratio||EPS 10-Year Avg (%)||Price / Earnings||Price to Graham Number||Consecutive Div. Growth Years||Price / Book|
|RS||Reliance Steel & Aluminum||62.90%||$11,442||4||17.90%||6.2||1||7||1.7|
Finding Defensive Stocks Results
Ben Grahams Strategy For Defensive Stock Beats The Market
In this chart, you can see that for the past two years, the Graham defensive investor stock strategy has beaten the market; this includes the Covid Crash and the 2022 crash.
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Are banks defensive stocks?
Yes, banks are considered defensive stocks because they offer stability and dividends, even in difficult economic times. Some of the most popular banks include JPMorgan Chase, Bank of America, and Citigroup.
Are REITs defensive stocks?
Yes, real estate investment trusts (REITs) are considered defensive stocks. Some of the most popular REITs include Simon Property Group, Prologis, and Public Storage.
Are utilities defensive stocks?
Yes, utilities are considered defensive stocks because people still need gas, electricity, and water even in difficult economic times. The most popular utilities include Duke Energy, Southern Company, and American Electric Power.
What are cyclical and defensive stocks?
Cyclical stocks tend to rise and fall with the overall economy. They are considered riskier investments than defensive stocks, which is why they offer higher potential returns. Defensive stocks, however, tend to remain relatively stable even in difficult economic times. They are considered safer investments than cyclical stocks and offer lower potential returns.
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