Your 3-stock defensive portfolio for steady returns

Profit from three companies that service our basic needs.

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When you want to build dependable earnings in your portfolio you can turn to defensive stocks. They’re the ones that will maintain certain levels of business even when the economy is down (or heading that way).

These businesses are typically in healthcare, consumer staples (food, etc.) and utility services. Just think what you would have on your monthly budget. The electricity and gas bills keep coming, you still have to eat, and if you get sick, it will be hard to avoid the doctor before too long.

Here are three defensive stocks that could keep your portfolio in the black, and pay a reasonable return over time.

Electricity and gas service

Origin Energy Limited (ASX: ORG) is an integrated energy company that develops oil and gas, operates power generators and does energy retailing to consumers. The $16 billion company has generated a total shareholder return of an average annual 14.3% over the past 10 years. Although it is classified in the energy sector rather than as a utility, a very large proportion of its revenue comes from servicing consumers and businesses with electricity and gas.

Its net profit margins are usually around 5%-6%, like a mature market player would regularly have. It isn’t a fast grower like a hi-tech stock, but will probably be strong in the energy-retail market for decades.

Food retailing and supermarkets

Wesfarmers Ltd (ASX: WES), the owner of such supermarkets as Coles, or Woolworths Limited (ASX: WOW) would fit the bill here. The two together control over 70% of the supermarket retail industry, with Woolworths as the number one market leader.

Focusing on Woolworths, it usually has about 3%-4% net profit margins, but it generates a pleasingly high return on equity in the mid-20s regularly. Its growth comes from keeping a dominant position in communities, and creating new stores to service more suburbs as the general population grows.

Its share price moves in a slow but steady way, trading roughly in a range for a period of time. Then it takes a step up to a new price range, thanks to its consistent earnings growth. Over the long-term, it has gone from about $11-$12 a share in 2004 to $36.13 now, so long-standing shareholders have had their initial share price tripled.

New market entrants like Aldi and Costco may stir up some competition, but Woolworths may weather that because it has such a powerful influence in the supermarket space.

Health Care and hospitals

Ramsay Health Care Limited (ASX: RHC) operates around 150 hospitals and day surgery facilities both domestically and abroad. It is a great example of a company which would regularly be categorised as a defensive stock, yet has shown quite impressive earnings growth in the past 10 years. Since 2011 underlying net profit has grown by about 31%, so the trend is still upwards.

Its share price has moved during that time roughly from $10 to $47.91 currently. Within the past several years, it has been on an acquisition path, picking up companies with networks of hospitals. Also it is expanding the floor space and service offerings of existing hospitals to improve revenue and earnings.

The growth strategy is paying good returns now, as can be seen from the most recent half year ending in December, when underlying net profit went from $138.4 million to $157.1 million, for a 13.5% gain.

Foolish takeaway

Defensive stocks may sound boring, but they reward long-term shareholders with wonderful earnings growth. The returns don’t have to be dull, just steady and accumulative, so any portfolio can use these three to smooth out the ups-and-downs of the share market.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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