After rising 24% in 2023 and 23% in 2024, the S&P 500 Index declined by 4.5% during the first quarter of 2025, including a correction that took it down more than 10% from record highs.
Investors are wondering whether the bull market is intact. Recent price action is a good reminder to be ready for anything.
That includes allocating some space in your portfolio for defensive stocks.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In his groundbreaking book on value investing, The Intelligent Investor, Benjamin Graham discusses the primary characteristics of defensive stocks.
They should be moderately priced, have a good record of paying dividends and be conservatively financed. These factors mean defensive stocks are well equipped to weather the vicissitudes of the stock market.
Defensive stocks can also produce stable returns, good income and long-term value for you.
What are defensive stocks in the stock market?
The typical defensive stock has three defining characteristics:
- a good history of dependable dividend growth;
- a conservatively financed balance sheet with little debt; and
- an inexpensive valuation.
Dividends. Companies that have a long history of dividend payments and have grown them over time tend to have stable price histories.
For example, the best dividend stocks for dependable dividend growth tend to fall less in bear markets. This works if the market believes the company will maintain the dividend, even while other stocks are tumbling.
Let's say that a stock has a stable history of dividend payments over an extended period of time. Also, let's assume the stock presently has an attractive dividend yield of 3.5%.
If its dividend payment rises by 5%, the market will tend to push the stock price higher by 5%, so as to maintain the same 3.5% dividend yield.
There is a more fundamental point about dividend-paying stocks that makes them defensive investments.
Companies normally can only pay dividends over a long period if they have positive earnings or strong free cash flow (FCF).
FCF is the money left over after expenses, interest on debt, taxes and long-term investments that are needed to grow the business have been paid.
In other words, they are fundamentally healthy.
At the same time, the best defensive stocks typically have low payout ratios. This means that no more than 50% to 60% of the company's earnings are paid as dividends.
This allows the company to reinvest its retained earnings for future growth.
Balance sheet. Another major trait of a good defensive stock pick is a conservative balance sheet. This means investors should stay away from certain types of stocks with the highest dividend yields.
Their share prices could be spiraling, making their yields rise and/or fall because they may have taken on large amounts of debt in order to pay out their dividends.
Another pitfall to avoid is a company that has issued too many shares. For example, some high-yield real estate investment trusts (REITs) can only afford their lofty dividends by constantly issuing new shares.
So, despite the high yield, the stock will not tend to do well over time.
Valuation. The third major characteristic of top defensive stocks is a cheap valuation.
Academic studies have shown that over long periods, stocks with low price-to-earnings (P/E) ratios and low price-to-book value (P/B) ratios do well over time.
What are drawbacks to buying defensive stocks?
One drawback of buying even the best defensive stocks is that they tend to generate conservative returns. They typically won't rise as much as other stocks during bull markets.
Of course, the opposite side is also true — they tend to not fall as much in bear markets.
Another drawback is that defensive stocks tend to be either in cyclical industries or low-growth arenas that aren't popular. The company might be profitable, but its earnings or sales growth rate could also be low.
And that is the conundrum for investors. The stock has an inexpensive valuation because of its defensive traits.
But it could be a cheap stock due to its slow growth rate, despite its stable dividends and conservative balance sheet.
What are examples of defensive stocks?
Here are a few examples of defensive stocks in today's market.
Old Republic International (ORI) is a large multi-line insurance company that has a 44-year history of annual dividend growth. And its dividends account for less than 40% of earnings.
Meanwhile, ORI stock has an inexpensive valuation of 12.3 times forward earnings, boasts a 2.9% dividend yield and has a conservatively financed balance sheet.
Chevron (CVX) is a very large oil and gas company that ended fiscal 2024 with $195.6 billion in revenue and $15 billion in free cash flow.
That FCF allows the company to pay an ample dividend, which has grown every year for the past 38 years.
As it stands, the blue chip stock now has an attractive 4.1% dividend yield. Its valuation is also cheap at less than 16.2 times forward earnings.
And Chevron finances its operations very conservatively, with just 10.4% net debt compared to its shareholders' equity.
HP (HPQ) is a profitable imaging and printing products company with related technology solutions and services. HPQ is a defensive stock for several reasons.
First, the company has paid a dividend for 35 years and has raised it in each of the past 15. Second, its valuation is attractive, with the tech stock trading at just 7.8 times forward earnings.
And HPQ is considered a defensive stock as its balance sheet is reasonably financed.
It produced $3.2 billion of free cash flow in 2024. This can be used to cover its dividends and continue to pay down the $6.4 billion of net debt on its balance sheet.
Related content
-
The Most Tax-Friendly State for Retirement in 2025: Here It IsRetirement Tax How do you retire ‘tax-free’? This state doesn’t tax retirement income, has a low median property tax bill, and even offers savings on gas. Are you ready for a move?
-
Plan for Higher Health Care Costs in 2026: Projected Medicare Part B and Part D PremiumsIn 2026, Medicare participants will pay more for their health care. Part B costs are expected to rise more than 10%. Here's what you can do.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Japan Tariffs: 5 Things That Might Get More Expensive for YouPresident Donald Trump's trade agreement with Japan features a 15% reciprocal tariff for all imported products, which could impact the prices of these items when you go shopping.
-
Five Questions to Help Ensure a Happy, Secure RetirementYou need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting ByLearning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
Dow Dives 542 Points on Soft Jobs Data: Stock Market TodayThe last day of a busy week ends with the first greater-than-1% move in either direction in more than a month.
