Defensive Stocks- A Bear Market Investment Strategy

Defensive stocks, also known as “non-cyclical stocks”, are the stocks of companies that tend to provide a constant dividend and earnings regardless of the state of the overall stock market and economy. While defensive stocks are known for their relative stability during economic downturns, they also tend to underperform the market during upswings.

Finding Defensive Stocks

Defensive stocks are hot hard to pick out as they typically offer a low P/E ratio, consistent dividend, and low beta (usually less than 1). For many, the key to identifying a defensive stock is earnings stability. Stable earnings make for stable dividends- a crucial component for the defensive investor. The yield offered by these dividend-paying stocks will lend stability to the stock price as investors in search of yield will not let a stock price fall too low before acquiring that stock.

Part of Your Stock Portfolio

Based on the investor’s age and risk tolerance, an investment advisor might recommend that some portion you their portfolio be allocated toward defensive investments as this balanced approach can make an economic downturn easier to tolerate.

The utility industry is an example of defensive stocks because people are in need of gas and electricity, regardless of the state of the stock market. People will also eat, drink, and purchase necessities (e.g. soap, toothpaste, gasoline) in a bad economy, bringing the companies that provide these into favor during a bear market.

Cyclical Investing

In stock market downturns over the past half century, defensive stocks have seen small gains or fallen less than other types of stock issues. For this reason, many investors look to defensive stocks during a market downturn. When the market bounces back, however, active investors will often choose more risky stocks (stocks with higher betas) in an effort to maximize their investment return.

Defensive Stocks v. Other Investments

Stocks that offer dividends have, historically, yielded higher returns than long-term treasury issues while enjoying favorable tax treatment. Furthermore, the stock capital gains generated from an increasing stock price.

More about investing in defensive stocks

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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