Recession and Defensive Stock Investing

A Defensive Stock is a stock that offers its investors stable earnings and a consistent dividend, regardless of the state of the stock market and the economy. These stocks tend to outperform the market during economic downturns but often under-perform during economic expansion. A defensive stock typically has a beta of less than 1.0. Defensive stocks are often characterized as the following:

This is the stock of a well-established company with financial stability. This type of company has demonstrated its ability to pay dividends almost regardless of the economic climate. In challenging economic times, stability of profits becomes extremely important to investors and blue chip companues companies are able to maintain their profits due to significant competitive advantages. Blue chips are often the stocks of companies that sell consumer staples, including soap, toothpaste, breakfast cereal and the like.

Companies that demonstrate consistent dividend payments to their shareholders, through good times and bad, become very attractive to investors during times of recession. The principle behind dividend stock investing is based on the belief that companies that pay high, consistent dividends must be mature and stable with consistent profitability. Most companies that fit this mold operate in industries that have proven to be less volatile and somewhat immune to fluctuations in consumer spending.

The fundamental strength of a company is critical to many stock investors. A company with a strong balance sheet and a history of stable profits is usually perceived as less risky and more able to endure an economic contraction. The fundamental analysis of a company usually involves the examination of its financial statements, management team, and its competitors. Investors will often look for healthy balance sheet ratios and adequate cash-on-hand as part of their due diligence.

________________________________________________________________

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.

« Earnings Yield and Value Investing | Home | The Bottom Fisher’s Stock Market Strategy »