Consumer Defensive: Get The Best Of These Constant Cash Flows

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Gordon Scott has been an active investor and technical analyst or 20+ years.

1. The sector outperforms with the second-highest volatility of all sectors.
2. As for price per dollar of dividend, the higher risk consumer cyclical dogs top ten averaged $11.35, while the lower risk consumer defensive dogs top ten averaged $16.84, a $5.49 spread.
3. Unlike stocks in the consumer discretionary sector, which includes companies like car manufacturers and hotels, stocks in consumer staples tend to hold steady when people reduce their spending during a recession.
4. For example, soft drink companies Coca-Cola (), Keurig Dr Pepper (), and PepsiCo () have generally experienced strong pricing power due to a lack of competitive private-label alternatives.

The purchase of consumer discretionary products is often compared with the purchase of consumer staples. My mission is to help self-directed individual investors profit from stock investing. In addition to my work for Dividends & Income Select, I have authored eight e-books on dividend growth investing, along with countless articles and videos on investing for income. Well-known companies include Altria Group (Marlboro cigarettes) and Diageo (Johnnie Walker and other liquor brands).

Telecommunication Services

These gain estimates were subject to average volatility 5% less than the market as a whole. One of the five top CONDEF Sector dividend stocks by yield was among the top ten gainers for the coming year based on analyst 1-year target prices. Thus, this yield-based forecast for CONDEF dogs was graded by Wall St. Wizards as 20% accurate. Fiat Chrysler Automobiles (FCAU) was projected to net $859.93, based on the median of target estimates from four analysts, plus dividends, less broker fees. The Beta number showed this estimate subject to risk 90% more than the market as a whole. The Morningstar US Consumer Defensive Index advanced 4% in the fourth quarter, trailing the market’s 11.5% return by 750 basis points.

Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. Brand-name soda makers may have the ability to retain or raise prices, because they face little competition from lower-cost, generic alternatives. For example, soft drink companies Coca-Cola (), Keurig Dr Pepper (), and PepsiCo () have generally experienced strong pricing power due to a lack of competitive private-label alternatives. When emerging markets came into play, they all rode the wave and discovered new playgrounds. However, they are more flexible and know their customers better than those “gringos” coming from North America. Buy America or buy local is not just a slogan that we have here in our countries.

However, at the same time we are seeing downward revisions to GDP growth forecasts, a slowing job market, and weak consumer spending. Defensive sector funds are mutual funds or exchange-traded funds (ETFs) that invest in companies in recession-proof industries. These industries are called “defensive sectors” because they tend to stay stable whether the market is healthy or not. In difficult times or if things are getting shaky, why would anyone even want to own a stock?

Consumer Staples

Consumer staples, also known as “consumer non-cyclical stocks,” tend to maintain more price stability in a down market than cyclical stocks. During an economic decline, consumers still need staples, such as cereal and milk, and they may even increase their use of so-called “sin stock” products, such as cigarettes and alcohol. Knowing this, some investors buy defensive sector funds, such as Vanguard Consumer Staples ETF (VDC), when they think a recession will occur. The consumer discretionary sector consists of a variety of industries that can be sensitive to changing economic conditions and bellwethers of consumer spending. The companies included in these industries react and adjust to changes in consumer discretionary income and purchases of non-essential products and services. Two primary distinctive differences between consumer cyclical and defensive sectors were in risk, as measured by beta, and price per dollar of dividend.

The level of interest rates is important for companies that tap the credit markets for business funding. U.S. monetary policy usually seeks to lower interest rates in contractionary phases to provide a business stimulus. Alternatively, in a weakening or weak economy, consumers are more likely to forego the purchases of non-essential consumer discretionary products in favor of adding to their savings.

In contrast, the S&P 500 information technology sector has dropped 13%. Building a defensive investment strategy might help protect you from greater losses during a recession or economic downturn. Investing in defensive stocks is one starting point, but it’s just part of the puzzle; you can further reduce your risk with a diversified portfolio containing a variety of holdings that are not all subject lexatrade login to the same market risk. The healthcare sector includes businesses that provide medical services and insurance, manufacture medical equipment or drugs, and/or facilitate patient healthcare in hospitals, clinics, labs, and nursing homes. Because healthcare is a necessity and medicine and medical equipment are always in demand, this sector offers strong defensive investment opportunities.

Lower sales can lead to worsening economic conditions and greater economic contraction. The classic definition of a defensive stock is based on it being from a company in certain steady sectors of the economy that are less sensitive to changing economic conditions. Ten top consumer cyclical sector dogs were culled by yield for this report. Yield (dividend/price) results as verified by YCharts did the ranking. Two of five top dividend-yielding CONCY dogs were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices. So, our May 24 yield-based forecast for CONCY dogs, as graded by Wall St. wizards, was 40% accurate.

When everybody is making money in the market and growth stocks get most of the love, you have a shot at buying unloved consumer staples. This is the type of investment that will make you almost regret having made the investment during a bullish year. On the other hand, when panic spreads, these companies will hold the fort and make sure your portfolio doesn’t go bust. The third lowest priced selection, Newell Brands Inc., was projected to deliver the best net gain of 32.68%. People depend on gas, electricity, water, and other utilities in daily life. Utility stocks include companies that provide or deliver these services.

The June 2019 Consumer Cyclical and Defensive Sector Top Dogs By Yield

The past year has been better, since the industry has gained 6.3% in that time. As for the next few years, earnings are expected to grow by 10% per annum. In the GICS column, traditional defensive companies are colored green, and all other companies are colored orange. As is my wont, I built a defensiveness scoring system in which no points are awarded for being in a certain economic sector, but rather points will be awarded for satisfying common notions of safety. Stocks listed above were suggested only as possible reference points for your Dow dividend dog stock purchase or sale research process. These include makers of beauty and personal hygiene products such as Estee Lauder and Procter & Gamble.

His experience suggests he understands the need for consumer-valued brand spending. We also see opportunity to remove inefficiencies, which should allow the firm to reinvest in its brands quebex with only a modest erosion in profitability. We think investors should give wide-moat Anheuser-Busch InBev a look, trading more than 30% below our assessment of intrinsic value.

When you invest in defensive sector funds, your main goal is to defend against significant decreases in share prices that might occur during these events. On top of selling “essential goods” (we could discuss how alcoholic and tobacco products are considered as essential another time), this sector also shows another great characteristic. Most of its industries have built their business model around repetitive sales. What’s better for a dividend investor than to find a business that keeps selling the same products to the same consumers every week? What you need is a clear analysis guideline that will tell you what is important to know and how to make the best investment decisions. The consumer defensive sector is particularly interesting during these times of uncertainties.

What Is a Defensive Stock?

In the consumer cyclical sector, all but one of the top thirty stocks by yield meet that goal (Las Vegas Sands (LVS) is overbought). During tough times, consumers will reduce spending on luxury items, such as entertainment, travel, and high-end clothing. Instead, they tend to buy only necessities such as food, healthcare services, and basic utilities. If you finexo review purchase defensive stock funds that invest in industries like these, your holdings should, in theory, decline less than others. That is because the assets that make up your fund are stocks that have historically remained steady in price during market declines. It’s hard to determine a good time to buy consumer defensive stocks as they are rarely “on sale”.

Many of those companies face similar challenges that consumer cyclicals face when it comes down to dealing with digital sales. Even groceries must invest massively in their online platform to enable consumers to order their food and pick it up at the store. Technological advancement is at the heart of consumer goods sector industry trends.