Are ‘defensive’ stocks the best place for your money?

Australia’s blue chips might not be as safe as you think.

a woman

An article published in The Australian Financial Review over the weekend raised an interesting question: what really is a defensive stock and are they really the right option?

Traditionally, Australia’s blue chip companies, such as the big four banks, Telstra (ASX: TLS) or supermarket giants Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) have been recognised as defensive stocks, in that they are seen as ‘safe’ places to put your money – but are they really?

In light of globally low interest rates and economic turmoil (still in the aftermath of the GFC), shares in each of the companies mentioned above have rallied in value substantially as investors have sought out higher income streams from dividends than those they would otherwise recognise from term deposits. However, the prices of many of these companies have become significantly overvalued suggesting that, over time, they will likely fall in value and reverse many of the gains recognised from dividends paid.

So just how ‘safe’ are these ‘defensive’ stocks? Sure, the companies might have established themselves as powerhouses in their respective industries and they may be amongst the safest in the economy from becoming obsolete or going bankrupt. As highlighted in Philip Baker’s article however, the nature of a defensive stock “really boils down to the price you pay.”

For instance, the banks would have been considered defensive options when they were at their lowest value around May 2012, but that may not be the case if you were to buy them at today’s valuation. That is, it may not represent a ‘safe’ option in that your investment could just as likely fall in value when interest rates inevitably increase and high dividend yields lose some of their appeal.

Foolish takeaway

Whilst there is certainly a higher level of risk involved when investing in growth stocks, the upside also seems much more appealing. There are quality companies still sitting at very reasonable prices with plenty of growth potential and many could argue that, in today’s economic environment, these may be more defensive options.

Instead, are you interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Ryan Newman does not have a financial interest in any of the mentioned companies. 

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »