Investing in ASX defensive shares

What are ASX defensive stocks?

Defensive stocks are shares in mature, dividend-paying companies that tend to post consistent profits, regardless of the state of the broader economy. They often operate in industries like consumer staples, healthcare, utilities, and some food and beverage businesses – particularly fast-food chains. 

Demand for these products and services remains high even in an economic downturn when consumers are reducing their overall spending.

We can compare defensive shares against cyclical shares, which tend to perform well only at specific economic stages. 

For example, the price of shares in luxury retail brands or travel companies might increase during an economy’s expansion and peak – when consumers have more disposable income to spend on high-end shopping and holidays – but will probably underperform during a recession.

The best way to think about defensive shares is to consider your household spending. If money was tight and you had to cut back on your costs, what products could you not live without? Chances are, it’s the stuff that defensive companies produce.

Why invest in them?

The main reason to buy defensive shares is to protect your portfolio from sudden, sharp declines in value. Because defensive companies have proven themselves to be durable and dependable over time – even in a crisis – their share prices also tend to be relatively stable. And the fact that they generally also pay regular, consistent dividends makes them particularly attractive for an income stream.

Defensive shares won’t provide anywhere near the level of returns you could gain from investing in growth shares or other more speculative stocks or asset classes. But defensive stocks also come with significantly lower risk than those additional investments, which means they can help protect your portfolio from the worst impacts of market volatility and downturns by providing stable, predictable returns.

Top defensive shares on the ASX

It has been a turbulent time for financial markets, with the lingering impacts of the COVID-19 pandemic, conflict in Ukraine, rising interest rates, and high inflation all rattling investors. Trading on the ASX has been incredibly volatile, and the S&P/ASX 200 Index (ASX: XJO) dropped by 5.5% in 2022.

Let’s look at how some of the best defensive stocks have held up during these troubled times. The companies listed below are from industries typically considered defensive, like healthcare and communication services, ranked by market capitalisation from high to low.

CSL

Leading Australian biotechnology company CSL is a unique case, in that its shares sometimes straddle the line between defensive stocks and growth stocks. 

Given the high-profit margins that exist in the biotech industry, innovations are highly valued by the market, giving companies like CSL massive growth potential. CSL also has a very proactive expansion strategy, using acquisitions such as Vifor Pharma to grow its revenue. However, at the same time, many of its therapeutics – particularly its influenza vaccines – are in consistently high demand.

This makes it a bit unreliable as an entirely defensive play. For example, over the past year, the CSL share price has dropped almost 3%, putting it ahead of the average performance of the ASX 200. It pays a regular and relatively stable cash dividend, and its annual dividend yield is about 1%, based on January 2023 prices.

Telstra

Chances are you probably view your phone and internet as essential services these days. More people are working remotely than ever before, and we rely much more heavily on telecommunications infrastructure to keep us all connected.

Telstra is Australia’s largest telco and tends to deliver stable, positive earnings over time while also paying a consistent dividend. However, it might not be the defensive stock it used to be, with its share price down more than 5% in 2022.

Nonetheless, Telstra has continued to pay dependable dividends throughout the pandemic, and its annual dividend yield is about 3% at January 2023 prices, potentially making it a good option for income-seeking investors.

Transurban

Transurban operates tollways in Australia, Canada, and the United States and is familiar to Melburnians as the owner of CityLink, a frequently used toll road connecting the city’s major freeways. According to Transurban’s website, there are more than two million daily trips on its roads.

Even during a downturn or recession, people always need to get from A to B, so demand for toll roads is likely to remain relatively high. This makes Transurban an ideal candidate as an ASX defensive share because it should maintain consistent, stable earnings over time.

After holding up well throughout most of 2022, Transurban shares have declined more recently, and are down almost 7% over the past 12 months. However, at January 2023 prices, Transurban pays a healthy annual dividend yield of 4%.

Benefits of investing in ASX defensive shares

As we’ve discussed, the main benefit of investing in defensive stocks is it will help stabilise your portfolio’s returns. This is particularly helpful when market prices are falling. The prices of defensive shares tend to hold up well during these periods, and the dividends earned can help offset losses you might have to realise elsewhere in your portfolio.

And the cons?

The obvious downside is that the prices of defensive stocks won’t rise anywhere near as much as many other shares when the economy is booming. So, although owning a portfolio composed entirely of defensive shares might give you consistency and stability over time, it also probably means you are missing out on many other more lucrative investment opportunities.   

Striking the right balance between defensive shares and your other investments will depend on your risk aversion and income needs.

Are ASX defensive shares right for you?

Buying defensive shares can be a great way to give your portfolio some added stability during market volatility. On the one hand, this means you won’t have your heart in your throat every time you go to check on the value of your portfolio. However, owning defensive stocks also means you might miss out on lucrative growth opportunities when the economy is booming.

Before deciding whether defensive shares are right for you, consider your personal risk appetite, income needs, and investment time horizon. If you are risk-averse, want extra income, or are approaching retirement, a portfolio weighted towards defensive shares might better suit your needs.