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I always remember a friend telling me that the time to buy defensive stocks is when the market is doing really well. Even though this might seem the wrong way around, it’s better to buy these UK stocks before any potential correction, as that’s the time when everyone else will be rushing to buy them as well.
Given the recent all-time highs on the UK stock market, here are two ideas I’m looking at.
Staying plugged in
First up is National Grid (LSE:NG). The stock is up 2% over the past year, with a dividend yield of 4.65%. It makes money by operating and maintaining the electricity and gas transmission networks in the UK and parts of the US.
Unlike cyclical businesses that depend heavily on consumer demand, its revenues are largely regulated by government bodies, meaning the company is allowed to earn a set return on its assets while passing through most costs to customers. This model provides stable and predictable cash flows regardless of the broader economy. This is one of the main reasons why I’d call it a defensive stock that should be able to weather any tough economic times.
Further, the ongoing transition toward renewable energy is driving long-term investment opportunities in grid infrastructure. Fortunately, National Grid is well-positioned to benefit. So if investors are thinking about which stocks to stick with when times get difficult, the long-term vision for the business should mean that not many would sell it in the short term.
Finally, it has an attractive dividend yield. At 4.65%, it’s above the index average and above the current base interest rate. However, there are risks involved. The company is exposed to changes in regulations from Ofgem, which can directly and negatively impact its finances.
Everyday essentials
Another defensive pick is Unilever (LSE:ULVR). The stock is down 5% in the last year, and has a dividend yield of 3.13%.
Unilever sells everyday consumer staples across food, personal care, and household product categories. Most of us buy their products on a daily basis without even realising it. This includes well-known brands such as Dove and Hellmann’s.
When you think about it, we buy these goods regardless of the economic environment. This gives the company a steady and recurring revenue stream.
Another reason why it has defensive appeal is its global footprint. Aside from just operating in the UK, other worldwide markets help to diversify earnings. This reduces reliance on any single market. Even though we might not like it, the necessity of the goods sold gives it pricing power, allowing it to pass on inflationary costs to consumers without severely hurting demand.
This resilience is a key reason why I like it. Of course, it has experienced a hit due to the recent US tariffs. This remains an ongoing concern and something that needs to be watched carefully. Yet, overall, I’m thinking about adding both stocks to my portfolio, just as a precaution against any future market wobble.