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Top Picks for Defensive Stocks

Defensive investments are ones that tend to either move opposite the market or have little to no correlation to it at all.

Image via Steve Morgan/Wikimedia

Defensive investments are ones that tend to either move opposite the market or have little to no correlation to it at all, explains Jason Williams, editor of Wealth Daily.

They’re also known as noncyclical stocks because they don’t react to economic cycles of recession and growth. They don’t fall as far as other stocks in a bear market or crash.

I’m not here to say there is or isn’t a crash coming. Historically, there will be another. I can’t tell you exactly when. But I can tell you that preparing for it now is something you should do. So, let’s get back to those defensive stocks.

Consumer staples are considered defensive because they tend to maintain more price stability in a down market than other stocks, such as growth or cyclical stocks.

During a recession, people still need things like cereal and milk. These companies tend to buck the downtrend in the market and provide a cushion of profit during tough times.

I’ve got two top picks for the staples sector, one that provides things people need and one that provides things they want. For supplying your needs and protecting your profits, AutoZone (AZO) is my top pick.

Not only does the company provide staples, but in tough economic times, people are more likely to do their own auto maintenance than take their car to a mechanic.

That makes AZO twice as strong during a recession. It won’t drop as far, and it’ll comeback a ton faster.

For supplying your wants and boosting your recovery, I recommend Constellation Brand (STZ). It makes beer. And people drink beer no matter what the economy is like.

In fact, studies show they drink more beer in bad times than in good. So adding some STZ to your portfolio is a smart move if you’re concerned we’re about to hit a crash.

Health care is a massive defensive sector. These are companies that offer products or services that consumers will continue to buy during recessions because health is a high priority and people still need to go to the doctor and buy medications in hard times.

Just because the economy is down in the dumps doesn’t mean people will stop caring about not dying. And when it comes to health care, my number one recommendation is without a doubt Johnson and Johnson (JNJ). The company is actually a double-defense.

Not only does it provide tons of healthcare products and supplies, but it’s also a big deal in the consumer staples sector. With JNJ, you get a bump from the staples and another from the health care. What could be better?

I’m not a huge fan of utility companies. They’re the closest thing to a government-approved monopoly we’ve got in the U.S. And they’re running up against some really big competition thanks to renewable energy options that cut the utility out of the picture.

But during a recession, they’re some of the best stocks you can own. They pay a steady dividend, so you get income to add to your profits (or cushion your losses). And, like toothpaste and soap, people don’t stop using energy when the economy stumbles.

So, if you’re looking for another protective position, an investment in a utility like Dominion Energy (D) should be something you’re considering. Dominion pays a 4.9% dividend yield.

It’s also got a beta of 0.23. At 0.23, Dominion follows the market, but just barely. It’ll drop some in a crash, but nowhere near as far as everything else.

Gold is my favorite investment for recession protection. When stocks go down, typically gold goes up. When money weakens, you need more of it to buy the same ounce of gold.

It’s a double benefit. You’re holding gold that’s going up in value because of rising demand. And you’ve got gold that’s going up in price because dollars just don’t buy as much as they used to.

You can sell your gold for a tidy profit and buy it back once the economy recovers and people aren’t so excited about owning precious metals. For ease of entry and exit, I recommend investing in a gold-backed ETF such as the SPDR Gold Shares (GLD).

You’ll pay an expense ratio of 0.40% of your total investment. That pays the folks managing the fund’s investments. But it’s a small price to pay for the comfort of knowing your savings will survive.

Jason Williams is editor of Wealth Daily.

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