I was having dinner with friends recently, and someone asked the question, "Stocks are expensive. How should I protect myself in case the market crashes? Should I short something, or maybe use options?"

For most investors, an exotic strategy like one of these isn't necessary. Instead, you can protect yourself from a stock market correction or crash by keeping some defensive stocks in your portfolio. Here are three good examples you may want to consider.

Man watching a stock chart plummet.

Image source: Getty Images.




Share Price

Dividend Yield

Toronto-Dominion Bank







Healthcare Real Estate



Realty Income


Retail Real Estate



Share prices and dividend yields current as of 3/6/17.

Simple, low-risk banking

The financial crisis left many investors with a lingering fear of bank stocks, and understandably so. However, not all bank stocks are the same. One that I bought specifically for its track record throughout tough times is Canada-based Toronto-Dominion Bank (NYSE:TD), which is better known simply as TD Bank.

The company's dividend history tells you all you need to know about its stability. TD has paid dividends for 160 consecutive years -- since before the Civil War. And the company never cut its payout during the financial crisis. How many U.S. banks can make either of those claims? (Note: TD pays dividends in Canadian dollars, so its dividend fluctuates often with exchange rates.)

TD has grown aggressively over the past decade or so, both organically and through acquisitions, but remains focused on retail banking, and emphasizes excellent customer service and conveniences that many other banks don't offer. Known as "America's Most Convenient Bank," TD keeps many of its branches open later at night, and on the weekends.

Finally, TD Bank still has plenty of room to grow, as it currently only has a presence in 15 U.S. states and Washington, D.C. If you're worried about a market crash stalling TD's growth, consider that some of the bank's best growth occurred during the financial crisis in 2008 with the acquisition of Commerce Bank.

Healthcare is needed in good times and bad

The first of two REITs in this discussion, Welltower (NYSE:WELL) is the largest real estate investment trust focused on healthcare properties.

Welltower owns over 1,400 healthcare properties in the U.S., U.K., and Canada, and is well-positioned to take advantage of favorable demographic trends in the healthcare industry. About 70% of Welltower's portfolio is made of senior housing properties, and the senior citizen population in Welltower's target markets is expected to grow rapidly over the next few decades.

Chart of 75+ population growth over next 20 years.

Image source: Welltower.

In addition, the healthcare real estate industry is highly fragmented and is in the early innings of REIT consolidation. It is estimated that less than 15% of all healthcare real estate is REIT-owned, and as an industry leader, Welltower is likely to benefit from this trend. The company has investment-grade (Baa1/BBB+) credit ratings, a low debt load, and the financial flexibility to pounce on attractive growth opportunities that arise.

Welltower has been around since 1971, and has established itself as a dividend-growth machine. Over the past 45 years, the company has increased its dividend at a 5.6% annualized rate, and has delivered an annualized total return of 15.5% -- a remarkable level of performance to sustain for so long.

Crash-resistant retail

One of my favorite dividend stocks to own in good times and bad times is net-lease retail REIT Realty Income (NYSE:O). Most people can understand why I might want to own a retail-based asset when the economy is booming, but isn't retail risky in a crash?

The answer is that retail is actually a defensive type of asset if you invest in the right kind, and lease it to tenants in the right way.

For starters, the right kind of retailers can do just fine, or do even better during tough times. Most of Realty Income's tenants operate in one or more of three specific kinds of retail.

  • Service-oriented -- Major tenants in Realty Income's portfolio include LA Fitness and AMC Theatres. These are businesses people have to physically go to, and are immune from online competition. Plus, many (like LA Fitness) are membership-based, which creates a steady revenue stream.
  • Low-price retail -- Discount clubs such as Sam's Club and dollar stores such as Dollar General are good examples. These businesses actually tend to perform better when people need to cut back on spending.
  • Non-discretionary retail -- Businesses in Realty Income's portfolio that sell goods people need include top tenant Walgreens, as well as convenience stores such as Circle K. When people need to cut back in difficult times, it's usually not on the products these businesses sell. Think of it this way -- during recessions, people still need to fill their prescriptions and put gas in their cars.

As a final point, Realty Income's tenants are on long-term (15 years or more) net leases. These leases, which require the tenants to cover most of the properties' expenses and have gradual rent increases built in, help keep occupancy high no matter what the economy is doing.

Crash-resistant doesn't mean crash-proof

All three of these stocks could be good to have in your portfolio during a market crash, but don't confuse the terms crash-resistant with crash-proof. These three stocks are crash-resistant, meaning their businesses are likely to perform just fine if the market takes a downturn.

On the other hand, it's entirely possible, if not likely, for their stock prices to go down during tough times, or for their business to take an earnings hit from time to time. No stocks capable of double-digit returns are without risk, and these three are no exception. Invest with the long term in mind, however, and you should do well with any of these.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.