Learn About Defensive Stocks And Their Examples

Stocks that provide steady dividends regardless of stock market fluctuations are defensive. As a result of the constant demand for these products, defensive shares tend to remain stable throughout business cycles. A defensive stock can help investors shield their portfolios from market volatility. As dividends and capital are preserved, these stocks tend to weather economic storms more effectively. 

Often, defensive sectors are characterised by stable revenues, consistent demand, and established market positions. In this article, find out what are defensive stocks, the industries that have these stocks, their characteristics, pros and cons, and their role in your portfolio.

What Are Defensive Stocks In India?

To understand what defensive stocks are, let’s quickly review the dividend concept. When you purchase shares in a company, you become its shareholder and own a share of the company. If the company decides to distribute profits to shareholders, you are entitled to a portion. Dividends are companies' ways of distributing profits to shareholders. Most dividends are paid directly into your trading account as cash dividends in the share trading app. Amounts are based entirely on shares held.. 

The definition of defensive stock in the stock market is those that provide constant dividends and steady earnings to their shareholders no matter what direction the market trend takes. These stocks have a steady demand for their products, so their stocks remain stable and don't show market volatility. 

The defensive stock class allows investors to diversify their portfolios since they can invest a portion of their capital in growth and stable stocks.

Which Industries Have Defensive Stocks In India?

The following industry list includes these stocks in India:

Utilities

Water, gas, and electricity are basic necessities of life. Due to this, demand remains the same throughout the entire economic cycle. As a result, they are least affected by changes in the market. Moreover, utility companies benefit from recessions because they can borrow at low-interest rates with little competition.

Consumer Staples

The stocks of companies producing or distributing consumer goods are usually considered in this stock category. Food, beverages, certain household items, tobacco, hygiene products, etc., are all consumer goods. These items have a certain cash flow, regardless of the economy. Compared to cyclical stocks, these stocks outperform during weak and underperform during strong economic conditions.

Healthcare Stocks

There will always be a need for medical aid regardless of the economy. Therefore, pharmaceutical manufacturers and medical device manufacturers come under this category. As competition from new branded and generic drugs increases, these stocks have become less defensive.

Advantages Of Defensive Stock

Defensive stock offers the following advantages:

Stability

They may offer steady returns for a long time since these stocks are in demand and don't go out of style. These stocks may be suitable for investors who cannot handle higher volatility.

Lower Risk

It is true that any investment involves risk, but these stocks are considered less risky because they are less likely to lose their value significantly. It may suit investors who prefer capital protection over high risk.

Outperformance In Recessions

It is common for companies to experience temporary drops in revenue during economic declines. Nevertheless, these stocks are likely to perform better than the overall market. Their earnings may remain stable during that time, allowing them to pay dividends. As a result, many investors move towards these stocks in unfavourable markets, which may result in price increases.

Disadvantages Of Defensive Stock

There are some disadvantages to defensive stock, including:

Potential Returns Are Lower

These stocks don't usually offer quick and significant returns. They may help investors protect their wealth, but they may not help them build it fast.

Higher Price

Due to the fact that so many investors turn to these stocks during an economic downturn, you may find them overvalued or high-priced. If the stock's demand is high, the price will rise, reducing your potential returns.

Underperformance In An Economic Boom

When the economy slows down, these stocks may perform well. However, when the economy booms, they may do poorly. When the economy booms, they would not see significant demand growth, so they may be unable to provide great returns. Therefore, investing requires knowledge of current market conditions. You can use share market apps to stay up to date on market conditions.

Characteristics of Defensive Stock

These are the characteristics of defensive stock:

Lower Beta

Beta indicates the stock volatility in relation to a benchmark index (such as Nifty 50 or Sensex). The beta of these stocks is typically lower than 1, indicating that they are less volatile than other stocks.

As an example, if a stock's beta is 0.6, it might rise 6% when the market increases by 10%. Additionally, stock prices may only drop by 6% if the market goes down by 10%.

Belongs To Non-Cyclical Industries

When the economy is doing well, some businesses, like automobile manufacturers, see higher demands, and in a recession or bearish cycle, they see lower demands. Moreover, some businesses, such as FMCG companies, have stable and predictable demand regardless of the economy's state.

Attractive Dividend Yield

There is a higher dividend yield on these stocks. It is possible to earn consistent returns by investing in defensive stocks since some of them pay dividends regularly. Some defensive stocks with higher dividend yields include ITC Limited, ONGC, Oil India, GAIL, Coal India, etc.

List Of Defensive Stocks In India

Let's review the top defensive stocks in India.

What Is The Role Of Defensive Stocks In Your Portfolio?

Defensive stocks play a crucial role in a well-balanced investment portfolio, offering a shield of stability during times of market volatility and economic uncertainty. These stocks belong to industries that tend to remain relatively resilient regardless of broader economic conditions. Their performance is characterised by consistent demand for essential goods and services, rendering them less susceptible to dramatic fluctuations compared to stocks from cyclical sectors.

In essence, defensive stocks act as a financial buffer, providing investors with a safeguard against the inherent volatility of the stock market. The primary goal of including defensive stocks in a portfolio is to mitigate risk and maintain a level of stability even when other segments of the market experience turbulence.

Typically, defensive stocks belong to sectors such as consumer staples, healthcare, utilities, and telecommunications. These industries offer products and services that are fundamental to daily life, regardless of economic ups and downs. People continue to buy groceries, use electricity, require healthcare, and communicate via telecom services, irrespective of whether the economy is booming or facing a downturn. This consistent demand ensures a relatively steady revenue stream for companies within these sectors, which is reflected in their stock performance.

Conclusion

Defensive stocks in India provide shareholders with steady dividends regardless of market trends. In India, these stocks can be identified by looking for stocks with betas below 1, higher dividend yields, stable earnings regardless of market conditions, etc. In unfavourable market conditions, these stocks may protect your investments. However, defensive stock may not provide significant returns when the market is doing well. Therefore, it is important to understand current market conditions before investing. Track different stock performance using a demat account app available to download on your smartphones.