# Understanding Defensive Stocks, Pros & Cons, and Examples

## What Is a Defensive Stock?

A defensive stock provides consistent [dividends](https://www.investopedia.com/terms/d/dividend.asp) and stable earnings regardless of the overall state of the [stock market](https://www.investopedia.com/terms/s/stockmarket.asp). There's a constant demand for these companies' products so they tend to be more stable during the various phases of the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp).

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

### Key Takeaways

*   A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market.
*   Well-established companies such as Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola are considered to be defensive stocks.
*   Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks.
*   The low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market.

## Understanding Defensive Stocks

Investors who seek to [protect their portfolios](https://www.investopedia.com/articles/etfs/062916/4-ways-hedge-next-recession-mdy-ashr.asp) during a weakening economy or periods of high [volatility](https://www.investopedia.com/terms/v/volatility.asp) may increase their exposure to defensive stocks.

Well-established companies such as Procter & Gamble ([PG](https://www.investopedia.com/markets/quote?tvwidgetsymbol=PG)), Johnson & Johnson ([JNJ](https://www.investopedia.com/markets/quote?tvwidgetsymbol=jnj)), Philip Morris International ([PM](https://www.investopedia.com/markets/quote?tvwidgetsymbol=pm)), and Coca-Cola ([KO](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ko)), are considered to be defensive stocks. These companies have strong cash flows and stable operations with the ability to weather weakening economic conditions. They also pay dividends and this can have the effect of cushioning a stock's price during a market decline.

> **Important**
>
> Defensive stocks are less likely to face bankruptcy because of their relative strength during downturns.

Why would anyone want to own a stock in difficult times or if things are getting shaky? Why not just go for the safety of a [Treasury bill](https://www.investopedia.com/terms/t/treasurybill.asp), which essentially has a risk-free rate of return? The answer is that fear and greed can often drive the markets.

Defensive stocks accommodate greed by offering a higher [dividend yield](https://www.investopedia.com/terms/d/dividendyield.asp) than can be made in low-interest-rate environments. They also alleviate fear because they're not as risky as regular stocks. It usually takes a significant catastrophe to derail their business model.

> **Fast Fact**
>
> Most investment managers have no choice but to own stocks. They'll migrate toward defensive stocks if they think times are going to be harder than usual.

Defensive stocks tend to perform better than the broader market during [recessions](https://www.investopedia.com/terms/r/recession.asp) but they often perform [below the market](https://www.investopedia.com/terms/b/belowthemarket.asp) during an expansion phase due to their low [beta](https://www.investopedia.com/terms/b/beta.asp) or market-related risk. Defensive stocks typically have betas of less than 1.0.

Consider a stock with a beta of 0.5. The stock could be expected to lose only about 1% if the market drops 2% in a week. But a 2% price gain in the market for one week leads to an expected increase of just 1% for a defensive stock with a beta of 0.5.

## Advantages of Defensive Stocks

Defensive stocks offer the substantial benefit of similar long-term gains but lower risk than other stocks. They have a higher [Sharpe ratio](https://www.investopedia.com/terms/s/sharperatio.asp) as a group than the stock market has as a whole. That's a strong argument that defensive stocks are objectively better investments than other stocks.

[Warren Buffett](https://www.investopedia.com/articles/01/071801.asp) became one of the greatest investors of all time in part by focusing on defensive stocks. It's not necessary to take excessive risks to beat the market. Limiting losses with defensive stocks may be more effective.

## Disadvantages of Defensive Stocks

On the downside, the low volatility of defensive stocks often leads to smaller gains during [bull markets](https://www.investopedia.com/terms/b/bullmarket.asp) and a cycle of mistiming the market. Many investors abandon defensive stocks out of frustration with underperformance late in a bull market and this is when they need them the most.

Investors sometimes rush into defensive stocks after a downturn in the market even though it's too late. These failed attempts at market timing using defensive stocks can significantly lower the rate of return for investors.

## Examples of Defensive Stocks

Defensive stocks are also known as [noncyclical stocks](https://www.investopedia.com/articles/00/082800.asp) because they're not highly correlated with the business cycle. There are a few types of defensive stocks.

### Utilities

Water, gas, and electric utilities are examples of defensive stocks because people need them during all phases of the business cycle. Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower.

### Consumer Staples

Companies that produce or distribute consumer staples or goods that people tend to buy out of necessity are generally thought to be defensive. They include food, beverages, hygiene products, tobacco, and certain household items. Consumers will find a way to buy them regardless of economic conditions.

These companies generate steady cash flow and predictable earnings during both strong and weak economies. Their stocks tend to outperform nondefensive or consumer cyclical stocks that sell discretionary products during weak economies while underperforming them in strong economies.

### Healthcare Stocks

Shares of major pharmaceutical companies and medical device makers have historically been considered defensive stocks. There will always be sick people in need of care. However, they aren't as defensive as they once were due to increased competition from new drugs and uncertainty surrounding regulations.

### Apartment REITs

Apartment real estate investment trusts ([REITs](https://www.investopedia.com/terms/r/reit.asp)) are also deemed to be defensive because people always need shelter but steer clear of REITs that focus on ultra-high-end apartments when you're looking for defensive plays. You might also want to avoid office building REITs and industrial park REITs that could see defaults on leases rise when business slows.

## What Are Dividends and How Are They Paid?

Dividends are a shareholder's portion of a company's earnings. They're often paid quarterly in cash or as additional stock. Dividends aren't guaranteed. They may be negligible or nonexistent if the company experiences a rock-bottom quarter financially.

## When Does a Poor Economy Become a Recession?

An official U.S. recession requires a declaration by experts at the National Bureau of Economic Research (NBER). It can't be an arbitrary opinion. Recessions can't be recognized until the country has experienced two back-to-back quarters of negative gross domestic product growth rates.

## Why Are Treasury Bills Considered Risk-Free?

Treasury bills are issued by the United States Department of the Treasury. You're effectively loaning money to the U.S. government when you purchase a Treasury bill and the government pays you interest on that loan. Treasury bills are also referred to as T-bills. They're backed by the "full faith and credit" of the U.S. government.

## The Bottom Line

Defensive stocks provide stable, consistent earnings and dividends. They're less susceptible to factors that affect the rest of the stock market. They’re much less risky but gains aren’t likely to be as substantial, particularly during bull markets. This isn’t to say that you should avoid them entirely but you might want to talk to an investment advisor about balancing your portfolio with other stocks.

_The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our [warranty and liability disclaimer](https://www.investopedia.com/legal-4768893#toc-warranty-and-liability-disclaimer) for more info._  
  

> **Article Sources**
>
> 1.  BusinessKnowledgeSource.com. "[What Does It Mean If My Stock Has a Beta of Less Than 1?](http://businessknowledgesource.com/investing/what_does_it_means_if_my_stock_has_a_beta_of_less_than_1_027316.html)"
>     
> 2.  Morningstar. "[What Is the Sharpe Ratio?](https://www.morningstar.com/investing-definitions/sharpe-ratio)"
>     
> 3.  Ally Financial Inc. "[What Are Dividends and How Do They Work?](https://www.ally.com/stories/invest/understanding-dividends/)"
>     
> 4.  CFI Education. "[Recession](https://corporatefinanceinstitute.com/resources/economics/recession/)."
>     
> 5.  CFI Education. "[Treasury Bills (T-Bills)](https://corporatefinanceinstitute.com/resources/fixed-income/treasury-bills-t-bills/)."