3 Defensive Picks to Add Stability to Your Portfolio

Key Points

• Though the New York Fed's model has predicted that the likelihood of a recession is down considerably from two years ago, investors still have reason to be cautious heading into 2025.
• Fortunately, major consumer staples and wholesale names like Procter & Gamble, Colgate-Palmolive, and Costco remain strong defensive plays.
• These companies offer essential and attractive values for customers even in difficult economic times and have the potential for strong dividends and growth for investors.

As of January 9, 2025, the New York Fed's model to predict the likelihood of a recession suggests there is a 29% chance the U.S. will enter a recession sometime in 2025. This figure is down sharply from just two years ago, when the model—which makes predictions based yield spreads between 3-month T-bills and 10-year Treasury bonds—gave a 70% chance of a recession.

Nonetheless, investors may still approach the new year with caution and may be on the hunt for recession-proof picks. Many analysts expect the S&P 500's rally—which has been going more or less continuously since the fall of 2022—to fizzle and perhaps even reverse course in 2025. There are plenty of unknowns, including a shifting regulatory environment, a different set of priorities from the new presidential administration, ongoing military activity in Europe and the Middle East, and much more.

For investors who have calculated that now is not the time to take a big risk with their portfolios, there are a number of defensive plays that analysts favor. These include major names in the consumer staples and retail categories such as Procter & Gamble Co. NYSE: PG, Colgate-Palmolive Co. NYSE: CL, and Costco Wholesale Corp. NASDAQ: COST.

Procter & Gamble: Dividend History, Room for Growth

The maker of a host of home and personal products, Procter & Gamble, has a 69-year history as a dividend king. The company's dividend yield of 2.48% and its annualized 3-year dividend growth of more than 5% are both attractive for investors looking to build passive income generation into their portfolios. The company has a long history of raising its annual dividend in April, giving investors time early in 2025 to enter or bulk up a position prior to that date. P&G also has a history of share buybacks, helping to further consolidate value for shareholders.

P&G shares are up about 9% in the year leading to January 9, 2025, after a fairly tumultuous period in 2024. They have fallen in the last month by about 5%, potentially indicating an opportunity to buy. Analysts see 11% upside potential based on a consensus price target of $179.75. Most importantly for cautious investors, P&G's huge lineup of consumer staples products means it's unlikely to take a major tumble even in challenging economic periods.

Colgate-Palmolive: Down Slightly From All-Time High, But Potential Remains

Colgate-Palmolive is, much like P&G above, a stalwart consumer staples company that makes a wide assortment of personal, home, and pet products commonly found all around the world. For investors, the company is also a reliable dividend play, with a history of payments going back more than six decades, a dividend yield of 2.29%, and annualized 3-year dividend growth of 3.4%. This makes comparing these two stocks relatively straightforward.

Notably, CL shares rose to an all-time high of more than $105 each by August 2024, likely the result of strong sales growth and improvement to its operating margin. The stock has fallen a bit since then but still trades at a higher price point than it has enjoyed for most of its history. Analysts now expect earnings to grow by a solid 8%, and the stock has a consensus price target of $103.63, just under its all-time high but still nearly 19% above the price as of January 9, 2025.

Costco: Expansion Plans and Stalwart Customer Base

This well-known wholesaler touched all-time highs near $1,000 per share in December 2024, but lingering concerns about inflation could continue to drive customers to Costco into 2025—and may push the share price into record territory as well. The company is engaging in an aggressive expansion plan that includes not only a wave of new brick-and-mortar stores but also its e-commerce arm, which saw a 21% increase in a recent earnings report.

Costco customers are famously loyal, and even when this loyalty was put to the test last year—the company increased its membership fee for the first time in seven years—customers responded not by discontinuing their memberships, but rather by increasing the member base by nearly 8% for the quarter. The increase should help drive profits in 2025 as well as 2026, giving investors a solid pathway to growth for the next several quarters.