The past year has been interesting for the stock market.
The S&P 500 INDEX (^SPX) recently hit a new high despite lingering geopolitical tensions.
Geopolitical events can easily shake up the global economy.
For example, a large-scale conflict in the Middle East could erupt at any time, potentially rattling global markets.
Such periods are where defensive stocks shine.
What are defensive stocks?
Defensive stock refers to shares of companies that provide consistent dividends and stable revenue and cash flow, regardless of the state of the stock market.
Typically found in sectors less sensitive to economic cycles, such as healthcare, utilities, and consumer staples, these stocks offer products and services that are constantly in demand.
These stocks are ideal for investors aiming to minimise risks while securing solid returns.
Defensive stocks generally offer higher yields than safer options such as short-term treasury bills, allowing for a moderate level of risk-taking.
However, while defensive stocks perform well during downturns, they may lag behind growth stocks in a bull market.
Historical performance of defensive stocks
Let’s review the historical performance of a defensive index versus a broader index.
The historical performance of the MSCI World Defensive Sectors Capped Index compared to the MSCI World Index reveals some interesting insights.
Source: MSCI
While the defensive index has shown consistent growth since its inception, it has generally increased at a slower pace compared to the broader market index.
However, it demonstrates stronger resilience to economic shocks.
While both indexes fell due to the Covid-19 pandemic, it was less affected by the turmoil in China’s property crisis from December 2021 to December 2022.
Extending this to a longer time frame, the performance gap between these two indexes further narrows.
Looking at the one-year annualised return, the broad index significantly outperformed the defensive index, with returns of 18.39% to 3.65% respectively.
However, as the time frame lengthens to 10 years or even 26 years, the gap in performance reduces.
Over 26 years, the difference in annualised returns is much smaller, at 6.13% for the broad index versus 5.88% for the defensive index (see table below).
Source: MSCI
3 defensive stocks to consider
After understanding the benefits of defensive stocks, here are three defensive US stocks that you can consider including in your investment portfolio.
For those interested in defensive stocks from Singapore, you can find suggestions in this article here.
Altria Group (NYSE: MO)
Altria Group has a leading portfolio of tobacco products for US tobacco consumers.
The company is one the world’s largest producers and marketers of tobacco, cigarettes, and related products, making it one of the undisputed market leaders in the US tobacco industry for decades.
One of its subsidiaries is Philip Morris USA, maker of the familiar brand, Marlboro.
For the first quarter of 2024 (1Q 2024), Altria’s net revenue decreased slightly by 2.5% year on year from US$5.72 billion to US$5.58 billion.
Net profit, however, increased by 19.1% year on year from US$1.79 billion to US$2.13 billion.
Altria announced a quarterly dividend of US$0.98 for the second quarter of fiscal year 2024 (2QFY2024). The dividend will be paid on 10 July 2024.
Quarterly dividend was raised from US$0.94 to US$0.98, a 4.3% increase, from a year ago.
The company is expected to deliver US$3.92 in dividends this fiscal year, giving its shares a dividend yield of 8.5%.
This also marks the sixteenth consecutive year Altria has raised its dividend for its shareholders.
Annual dividend payout has been increasing at a healthy compound annual growth rate (CAGR) of 7%.
Altria Group paid out US$1.7 billion in dividends for the first quarter of FY2024, equivalent to 83% of its profits generated from the prior quarter.
While this demonstrates the group’s commitment to shareholder returns, the high dividend payout ratio might constrain the company’s potential for long-term growth.
However, given the addictive nature of Altria Group’s products, we can expect demand to remain consistent regardless of economic conditions, making it a solid addition to an investor’s portfolio.
Gilead Sciences (NASDAQ: GILD)
Gilead Sciences is a biopharmaceutical company that discovers, develops, and commercialises medicines for several diseases and medical conditions.
It is a global leader in developing Human Immunodeficiency Virus (HIV) drugs for AIDS, with HIV drug sales accounting for around 64% of the company’s revenue for 1QFY2024.
The pharmaceutical firm also boasts a broad portfolio of treatments for liver disease and cancer that are experiencing growing demand.
The company recently announced a US$0.77 quarterly dividend per share for FY2024, a 2.7% increase from the previous year’s US$0.75.
This also marks the ninth consecutive year Gilead Sciences has had dividend increases.
Gilead Sciences stands out as one of the highest dividend-yielding companies in the pharmaceutical industry.
It has a current dividend yield of 4.5%. This is significantly higher than other heavyweights such as Eli Lilly (NYSE: LLY) at 0.6% or Merck (NYSE: MRK) with 2.3%.
HIV control is a public health imperative.
As a cure for HIV is unattainable; the disease can only be suppressed through lifelong medication.
This ensures a steady demand for HIV drugs, bringing in a consistent stream of revenue and cash flow for Gilead Sciences.
Additionally, Gilead Science’s recent acquisition of CymaBay Therapeutics for US$4.3 billion demonstrates its long-term strategy in expanding its medical portfolio beyond HIV drugs, which is expected to further strengthen the company’s future prospects.
Colgate-Palmolive Company (NYSE: CL)
Colgate-Palmolive is a manufacturing company that produces health and hygiene products for consumers globally.
The company is globally recognised for its flagship toothpaste brand, Colgate, and is also the world’s leading toothpaste producer.
International sales contribute the majority of Colgate’s total sales, with Latin America being the largest contributor at 25%.
This global diversification helps stabilise demand across varying economic conditions.
Colgate operates in the consumer staple sector, producing and selling essential goods such as dental care, home care, and personal care products.
These include products such as toothpaste, soap, and fabric softeners.
Demand for these staple consumer products tends to be stable over economic cycles, translating to steady revenue and dividend payouts from the consumer giant.
The company has recently declared a dividend of US$0.50 per share for 2QFY2024, reflecting a 4.2% increase from the previous quarter’s US$0.48 per share.
On an annualised basis, the new dividend rate will be US$2.00 for FY2024, up from US$1.92 the previous year.
Colgate has cemented its position as a reliable dividend payer, with uninterrupted dividends since 1895 and annual increases for the past 60 years.
These attributes above make Colgate a suitable addition to a defensive investor’s portfolio.
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Disclosure: Aw Kai Rui does not own any of the stocks mentioned in this article.
