Blue-chip consumer stocks are a good example of what stocks are defensive and good investments at the same time

What stocks are defensive? Most so-called “defensive stocks” are in the Consumer sector. They benefit from continuous, habitual use and have a steady core of sales, regardless of the economy and business cycles. These companies typically make products like soap or soup.

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Discover what stocks are defensive to help protect your portfolio from downturns

Defensive stocks in the Consumer sector can provide the most effective protection against economic downturns. That’s a key difference between Consumer stocks and companies in the Manufacturing & Industry or Resource sectors, which are far more sensitive to the ups and downs of the economic cycle.

At the same time, as a general rule, resource stocks can provide the most effective hedge against inflation because they directly gain from rising prices of the commodities they produce. Utility stocks used to provide a hedge of sorts against recessions, due to their steady, regulated earnings and dividends—but many now have a big part of their operations in unregulated businesses.

However, although it pays to be aware of these general tendencies, you should resist the temptation to fine-tune your portfolio according to theories or predictions about inflation and economic downturns. No one has ever consistently predicted either one, neither the timing nor the degree, so most investors will want to include stocks from most if not all of the five economic sectors in a well-balanced portfolio.

What stocks are defensive stalwarts for your portfolio? Find out how high-quality, blue-chip consumer product companies can provide you with stability during a recession or economic slowdown

Strong consumer product companies have similarities, like a record of rising cash flow and strong balance sheets.

Below are three safety factors and three financial factors we like to see in companies when we look for overall investment quality.

Safety factors:

1. Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.
2. Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
3. Freedom to serve (all) shareholders. High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.

Financial factors:

1. 5- to 10-year history of profit. Companies that make money regularly are safer than chronic or even occasional money losers.
2. 5 to 10 years of dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.
3. Manageable debt. When bad times hit, debt-heavy companies often go broke first.

Understand what stocks are defensive—as well as Blue-chips—to improve your portfolio over time

Blue-chip stocks are, by definition, the strongest and most secure stocks in the market. They offer investors a two-fold benefit.

They give you the greatest likelihood to profit when markets are up, and the best chance to resist market downturns or changing industry conditions, thus bringing an additional measure of safety to your investment portfolio.

Most blue-chip stocks pay dividends, which means you can look forward to steady returns in both income and capital gains over the long term. Blue-chip stocks have strong positions in healthy industries and experienced management that will make the right moves in a competitive marketplace. In short, they are your best bet in the search for investment quality.

Here’s more on the benefits of blue-chip stocks for your portfolio

Blue-chip stocks have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

In a deep or long-lasting market setback, your blue-chip stocks will tend to go down, along with everybody else’s. But we think they will go down less and recover sooner. Of course, nobody can guarantee that. For that matter, nobody can put a limit on how deep a market setback will go, nor how long it will last.

We feel most investors should hold the bulk of their investment portfolios in securities from Blue-chip companies. Generally, these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects, compared to alternative investments.

Use our three-part Successful Investor approach to help select the best defensive blue-chip stocks for your diversified portfolio

1. Invest mainly in well-established, mainly dividend-paying companies.
2. Spread your money out across the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities).
3. Avoid or downplay stocks in the broker/media limelight.

Which “defensive stocks” have provided the most stability to your portfolio?