Equity as an asset class isn't homogeneous and is subdivided into various subcategories. Stocks can be classified as growth or value. Similarly, we can divide them into aggressive and defensive stocks. What are defensive stocks and should you buy them now?
Defensive stocks have done well recently and some of the brokerages are suggesting that investors move at least some of their portfolio towards them.
What are defensive stocks?
While Shakespeare might not agree, the name says it all, or at least most, about defensive stocks. These are stocks of companies whose business isn't impacted much by economic cycles and their earnings (and dividends) are stable. Think of products that you would use irrespective of the economic cycle.
Utilities, consumer staples companies, telecom companies, and healthcare companies are some of the prime examples of defensive industries. These are the products and services that you wouldn’t cut down on generally. Also, you wouldn't spend more than usual on these services even if you get a windfall.
Should you buy defensive stocks?
Rising coronavirus cases could jeopardize the economic recovery. If the markets crash, defensive stocks tend to fall less than the markets since most of them have a beta below 1. Some of the defensive stocks could even rise if the markets correct as investors shift their portfolios from aggressive names to defensive ones.
Best defensive stocks to buy now
If you're looking to invest in defensive stocks, you can choose from several options including:
- Edison International
- CVS Health
- United Health Group
- Mondelez International
Verizon also forms part of Berkshire Hathaway’s portfolio. The stock has a dividend yield of 4.5 percent, which is nearly thrice of the S&P 500’s dividend yield. Coca-Cola has been another long-time Warren Buffett favorite. The stock has a dividend yield of just under 3 percent and is a good defensive stock to hold for the long term. Edison International is another defensive utility company with a dividend yield of around 4.8 percent.
In the healthcare space, United Health and CVS Health look like good defensive stocks. United Health is the largest health insurer in the U.S. The stock’s dividend yield is in line with that of the S&P 500. Analysts' estimates call for a 10 percent upside in the stock over the next 12 months.
CVS Health is another defensive healthcare stock. The stock is up 16 percent YTD. It has a median target price of $95.50, which is a premium of 17.1 percent over the current prices. Among the 26 analysts polled by CNN Business, 20 rate it as a buy, while six rate it as a hold or some equivalent. The stock has a dividend yield of 2.4 percent.
Morgan Stanley on defensive stocks
In July, Morgan Stanley warned of a stock market correction between 10 percent and 20 percent and advised investors to pivot towards defensive names. The brokerage upgraded the consumer staples industry to overweight and downgraded cyclical stocks. “Consumer Staples are the epitome of boring, but boring can be beautiful if the broader market begins to falter,” Morgen Stanley said in its note.
In the consumer staples space, Mondelez International looks like a good defensive stock to buy. It has a dividend yield of 2.3 percent. While the stock is underperforming the markets in 2021, analysts see it rising 15 percent over the next 12 months.