How to Build a Defensive Portfolio with Dividend Stocks: The Complete Guide
Investments 101
September 11, 2024
During times of economic uncertainty, many investors seek strategies that provide stability and consistent returns. A popular option is constructing a defensive portfolio, which aims to protect against market downturns and generate income through investing in dividend stocks. When selecting stocks, it can be useful to choose those with high dividends, low volatility, and belonging to defensive sectors.
Are you interested in learning how to invest in dividend stocks in a defensive portfolio? In this Hapi article, we explain everything you need to know to build a defensive portfolio with dividend stocks.
When the market is down, many investors look to protect themselves from these drops and achieve positive returns despite the context. For this reason, experts suggest allocating a significant portion of the portfolio to defensive stocks. Here are some factors to consider.
Defensive sectors are those that tend to perform well regardless of how the economy is doing. This is because they offer essential goods and services that people are unlikely to cut back on during a crisis.
Healthcare: This sector has a constant demand and is not very sensitive to price changes. This means that consumers have a high willingness to pay for this type of service to take care of their families and themselves. Examples include clinics, pharmacies, and laboratories like United Health Group (UNH), Merck (MRK), and CVS Health Corp (CVS).
Consumer Staples: Purchases of consumer staples such as food, beverages, and personal care products tend to remain stable during economic hardships, as they cover basic and permanent needs. Companies like Procter & Gamble (PG), Walmart Inc. (WMT), and Colgate-Palmolive (CL).
Utilities: The utilities sector is known for being defensive. Even in adverse economic situations, many households tend to maintain their water and electricity consumption, as do companies as part of their spending priorities. For example, NRG Energy (NRG), PG&E (PCG), and American Water Works (AWK).
Assets with low volatility generally tend to have smaller declines during economic crises. A simple measure to evaluate an asset's volatility and risk is the beta. The beta of a stock reflects how much it moves in relation to market movements (for example, the S&P 500).
Its interpretation is quite simple: if a stock's beta is greater than 1, it will be more volatile than the market. Conversely, if a stock's beta is less than one, it will be less volatile. When building a defensive portfolio, stocks with a beta less than 1 are often considered.
For example, Procter & Gamble (PG) has a beta of 0.43. This means that if the S&P 500 drops by 1%, its stock will only drop by 0.43%.
Dividends are regular payments that companies make to their shareholders as a way of sharing their profits. Some companies pay them monthly and others quarterly.
Investing in dividend stocks is attractive, especially when the market is down, because companies do not easily change these payments. This way, you can consistently have a passive income despite the market's ups and downs.
The indicator to know how much dividends a stock pays is the Dividend Yield. It is the result of dividing the annual dividends per share by the price per share. It is similar to the interest you can get from a savings account.
Let's see an example with Johnson & Johnson (JNJ). The company pays USD 4.96 per share, and its current price is USD 148.1. Dividing this, we get a Dividend Yield of 3.32%.
Building a defensive portfolio using dividend stocks can be an effective strategy to protect against market downturns and generate consistent income over time.
By investing in companies in defensive sectors, with low volatility and stable dividends, investors can increase the stability and profitability of their portfolio, even through different stages of the economic cycle.
Are you interested in applying this defensive strategy? You can start investing in dividend stocks from wherever you are in Latin America. With Hapi, you can do it, as it also has a dividend calendar that helps you keep track of dates. Just register and start investing with confidence because Hapi is a regulated broker. Join the more than 400K users who already trust us. Start investing here!
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