Stocks can be a valuable part of your investment portfolio. Owning stocks in several companies can assist you build your savings, protect your cash from inflation and taxes, and maximize income from your investments. It’s important to know that there are risks when buying the stock market. Like any investment, it helps to comprehend the risk/return relationship as well as your own tolerance for risk.
Canadian defensive stocks, Different Benefits
The two main types of equity investments below can each offer investors different benefits.
1. Common shares
Common shares are the most (you guessed it!) common kind of equity investment for Canadian investors. They are able to offer:
Capital growth. The price of a stock will go up or down over time. When it goes up, shareholders can choose to trade their shares at a profit.
Dividend income. Many companies pay dividends to their shareholders, which may be a source of tax-efficient income for investors.
Voting privileges. The ability to vote means shareholders have some way of measuring control over who runs the company and how.
Liquidity. Typically, common shares can be bought and sold quicker and easily than other investments, such as real estate, art or jewellery. This means investors can get or sell their investment for cash with relative ease.
Advantageous tax treatment. Dividend income and capital gains are taxed at less rate than employment income and interest income from bonds or GICs.
2. Preferred shares
Preferred shares can offer investors the following benefits:
Reliable income stream. Generally, preferred shares come with a fixed dividend amount that must definitely be paid before any dividends are paid to common shareholders.
Higher income. Compared to common shares, preferred shares have a tendency to pay higher dividends. (Note: preferred-share dividends come with the same advantageous tax treatment as dividends on common shares.)
Variety. There are many types of preferred shares, each with different features. For instance, some enable unpaid dividends to accumulate, while some can be changed into common shares.
A defensive stock is a stock that provides regular returns, regardless of how the currency markets or economy is doing.
Defensive stocks typically participate in well-established companies that offer goods and services people always need: household staples, utilities, and healthcare.
Defensive stocks protect a portfolio from loss, but usually do not offer much growth potential.
Most people invest for appreciation – to obtain their money grow. But growth isn’t the only goal worth considering. An intelligent investment strategy also protects a portfolio, shielding it against financial downturns.
Defensive stocks work as their name suggests: They defend an investment portfolio against loss. While they don’t really offer huge growth potential, they perform regularly even during periods of monetary decline, when other equities are tumbling.
What is a defensive stock?
A defensive stock is a stock that can be relied to provide regular returns even during an economical or market downturn. Typically these companies offer goods or services that folks continue steadily to buy even when the economy isn’t succeeding.
There are no hard and fast rules to define a defensive stock, but there are a few general guidelines you should look for:
History of success: The company is established and very large in dimensions. It has a couple of decades in business, at the minimum, and an overall total market value in the billions is a reasonable threshold.
Consistent dividends: The stock has constantly paid dividends over an extended time frame – 10 years or longer.
Low volatility: The beta coefficient, which measures a stock share’s movements set alongside the overall stock market’s is low – ideally below one. This indicates that the stock isn’t greatly affected by market swings. The beta coefficient is a complex economist’s tool, nevertheless, you can often realize its in analyst’s reports on the company, or it can be included in its online stock listing.
Conservative investors and investors who are investing to preserve capital often lean toward defensive stocks because of their reliability, while more aggressive investors may avoid defensive stocks altogether and protect their wealth by maintaining a buffer in cash and/or bonds.
However, a mix of both is usually wise. By developing an investment strategy which includes a healthy balance of both defensive and cyclical stocks in your portfolio, you’re able to shield against total loss during a downtown and make the almost all of periods of monetary growth.