A new guard in defensive shares

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BUILDING a defensive share portfolio used to be as simple as buying big banks and supermarket giants.

Those days are gone. Not only have the banks, Woolies and Wesfarmers sunk like stones on the sharemarket over the past year, but a new guard of defensive stocks has emerged and should be on investors radars.

Defensive stocks are typically those that do not follow the ups and downs in the economy, unlike resources and discretionary retailers. They tend to stay stronger in times of market turmoil and usually pay a solid, reliable dividend income.

Banks are still seen as defensive, but have been joined by big companies in sectors such as healthcare, utilities and infrastructure.

Baker Young Stockbrokers managed portfolio analyst Toby Grimm says healthcare has been one of the best, if not the best-performing sector on global markets for the last three or four years.

Health has always been there, but we havent had the representation in our market. We now have very, very large companies in that space, he says.

Health-related companies now make up 8 per cent of the top 50 stocks on the Australian Securities Exchange through CSL, Ramsay Health Care, Sonic Healthcare and Medibank.

Grimm says telecommunication companies were becoming more defensive as their products were now a necessity for many consumers. Telstra has held up very well in the latest sharemarket volatility, he says.

Telecommunications and mobile data has become like a new infrastructure.

Infrastructure companies such as Sydney Airport and Transurban have been strong defensive stocks in recent times, prompting many analysts to now see them as overvalued.

Middletons Securities adviser David Middleton says health stocks such as CSL and Ramsay also look expensive at current prices.

He says for high, reliable dividend yields with tax benefits from franking credits, its now hard to look past the big banks.

Eighteen months ago we thought the banks were too expensive, but now theyre compelling. If you buy a cocktail of banks you can get close to a 10 per cent grossed-up yield.

Middletons likes ASX for its monopoly over much of the sharemarket, and also Coca-Cola Amatil. People are going to keep drinking it.

Middleton says the key to a good defensive share portfolio is diversification. If you can find a really good company or two in a wide range of sectors, you are going to go OK, he says.

Look for companies with a strong market share who are price makers and not price takers. Focus on yield as much as possible.