Defensive stocks, also known as non-cyclical stocks, are any stocks that tend to provide constant dividends and stable earnings regardless of the state of the market. They tend to be companies whose products have consistent demand, allowing them to stay relatively stable during cyclical change. A defensive stock will likely perform better than the overall market during a recession, but weaker than the overall market during periods of expansion. They have low relative risk and performance to the market, with betas of less than 1. Active investors will seek out defensive stocks when expecting a downturn, but may behave coolly toward them when expecting an upward market.
Prime examples of defensive stocks include utilities, consumer staples (including food, beverages, tobacco, and basic household items), and health care stocks. Apartment real estate investment trust (REITs) can be defensive stocks, both due to the need for housing and the requirement that they pay at least 90% of their taxable income in shareholder dividends each year. Many well-established blue chips such as Procter & Gamble and Coca-Cola could also be considered defensive stocks.
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