Defensive stocks: A guide for teen investors

Embarking on your investment journey? Fantastic! One of the first items you'll want to check off your to-do list is to learn the meaning of "defensive stocks."

Picture defensive stocks as your trusty sidekick in the rollercoaster world of investing. These are shares of companies that provide the goods and services we can't live without — think utilities, healthcare, and food. No matter the economic weather, be it a slight drizzle or a full-blown storm, these stocks are more likely to hold their ground compared to other types of investments.

The stock market is a vast, unpredictable ocean. Defensive stocks are some of the sturdier ships in this sea, navigating steadily through both calm and choppy waters. Stick around to learn why defensive stocks may be a smart choice, especially if you're just dipping your toes in the investment waters. We'll also explore how to find them and what the defensive sector is in the world of investing. 

But before we dive in, note that this article is for educational purposes only and not intended as financial advice. For personalized investment guidance, consult a financial advisor.

So, what are defensive stocks anyway?

Defensive stocks can be relatively dependable companions throughout your financial journey. While high-growth stocks might ride the highs and lows of the economy's most unpredictable areas, defensive stocks are more balanced and smooth. That's because defensive stocks come from companies that focus on life's necessities — from your morning cereal to your home's heating.

The superheroes of the stock market

While there's always going to be risk when it comes to investing, defensive stocks may help protect your portfolio from sinking to the lowest lows when the stock market takes a tumble. Just like Superman has his invincibility and Batman has his gadgets, defensive stocks have special powers that give them a better chance at remaining strong and resilient, even in the face of adversity.

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But what's their secret power? It lies in the products and services they provide. Superman's strength comes from the sun, and defensive stocks gain their stability from the essential goods and services they offer. These are things that people will always need, regardless of the state of the economy.

This consistent demand for their products and services provides a more stable foundation. So, these stocks carry less risk, even when other sectors are struggling. It's this underlying strength that sets them apart in the financial world.

The defensive sector unmasked

The superhero team of the stock market is the defensive sector. This sector is made up of three main industries: utilities, healthcare, and consumer goods. Let's explore this sector — and why it's so important — below.

Why we can't live without the defensive sector

Think of utility companies as the Iron Man of this team. They provide essential services like electricity, water, and gas to homes and businesses. They have a steady stream of income — that's why they're less affected by economic downturns.

Healthcare companies are like the Wonder Woman of the defensive sector. They provide important medical services and products that people need regardless of the economy's state, such as pharmaceuticals and medical equipment. These companies keep society healthy and running.

Last but not least, consumer goods companies are akin to Captain America, providing everyday goods such as food, personal care products, and household items. These essential products are always in demand and remain stable even when the economy's not doing well.

So, while the stock market may go through its ups and downs, the defensive sector remains steadier than others thanks to these three industries.

Real-world examples of defensive stocks

We've talked about why the defensive sector is important, but which companies actually fall into this category? Let's take a look at some real-world defensive stock examples (the abbreviations in parentheses are the company's stock symbols):

• Procter & Gamble (PG): Known for brands like Tide, Pampers, and Crest, Procter & Gamble sells essential household products.

• Coca-Cola (KO): The iconic beverage company, Coca-Cola, is another example of a defensive stock. No matter the state of the economy, people still crave their favorite soda and other products from the brand.

• Costco Wholesale (COST): As one of the largest retailers in the world, Costco is known for providing bulk items at affordable prices. During tough economic times, one thing is for sure: People will turn to quality discount stores like Costco for their essential needs.

• Colgate-Palmolive (CL): This company makes Colgate toothpaste and Palmolive dish soap and has been around for over 200 years.

We can't forget about the healthcare sector, either. Here are a few examples of defensive stocks in this industry:

• Johnson & Johnson (JNJ): This healthcare giant is known for its diverse portfolio of products, including consumer goods like Band-Aids and Tylenol. 

• Pfizer Inc. (PFE): As a leading pharmaceutical company, Pfizer is another healthcare stock that remains strong during economic downturns.

• UnitedHealth Group (UNH): This health insurance provider offers medical coverage to millions of Americans. 

And in the utilities corner, we have companies such as:

• NextEra Energy (NEE): This renewable energy leader is riding the wave of sustainable power demand. It's also a large electric utility company and has natural gas and oil operations.

• American Water Works Company (AWK): This is the largest water utility in the U.S. With a stable and well-established business model, American Water Works Company is a defensive stock that offers consistent returns.

• Dominion Energy (D): This major energy company delivers natural gas, renewable energy, and regulated utilities. As people continue to use electricity and energy in their daily lives, Dominion Energy is unlikely to see any significant drops in demand.

How these stocks respond in tough economic times

Defensive stocks do better than high-growth stocks during tough economic times and major crises.

For example, during the financial crisis of 2008, PG's stock declined by about 30%, which was much less than the S&P 500's drop of around 52%. More recently in the 2020 crisis, PG's stock declined by about 18% after the WHO declared a global health emergency, while the S&P 500 fell by 25.4%.

NextEra Energy (NEE) has also shown its superpowers during past economic downturns. In the 2008 crisis, NEE's stock saw a lesser decline of about 24% compared to the S&P 500's 52% fall.

How to invest in defensive stocks

If you're starting your investment journey (how exciting!), defensive stocks may be investments you’re considering. They're not as wild and unpredictable as some other stocks, which makes them a less risky choice for beginners. You won't have to worry as much about big swings in your investment money like you would with other kinds of stocks. 

Greenlight tip: Did you know? You can use your Greenlight app to research 4,000+ stocks and ETFs. Then, propose trades — right from your app.

The role of defensive stocks in a diversified portfolio

Now, let's talk about mixing things up to diversify your portfolio. 

When you diversify your portfolio, you choose many different types of investments so you don't put all your bets on one company or industry. Imagine your investments as a collection of superhero toys. Some may have flashy powers and get all the attention. But some work behind the scenes to keep things stable. You need this mix of characters so your collection is well-rounded and able to handle different situations.

Your journey in the stock market begins

Alright, you've got the basics down!

Remember, compared to other types of stocks, defensive stock investments tend to be more reliable and less likely to give you a wild ride. They're a great starting point for new investors and a smart way to potentially balance risk in your portfolio. They also make a wonderful gift (hint, hint, Mom and Dad!) if you're interested in learning more about investing.

Ready to dive deeper into the world of stocks? Greenlight’s investing app for kids and teens has videos and educational tools so you can prepare to be a master investor — all under the guidance of your parents. Happy investing!