The prediction drums of the financial news media continue to grow louder with predictions of the next economic recession and a possible stock bear market. This has been going on for over a year, and you are probably starting to wonder if these predictions are accurate and if you should make changes in your investment portfolio.
The fact is the economy will go into recession. The growth and recession cycle of the economy remains intact. The challenge is that no one can accurately predict when the next recession will arrive. You can help your portfolio for when the next downturn will hit with some defensive stock picks.
Keep in mind that a recession is a period of negative economic growth. It is not an economic collapse. Many companies will continue to do well through the downturn. The companies and stocks at risk are those dependent on either strong economic growth or have high debt loads that will crush profits if a company experiences even a minor slowdown in revenue.
An economic recession will likely trigger a bear market in the stock market. You can’t avoid a stock portfolio value drawdown, but you want to own shares of companies that have businesses that will not be negatively affected by the slower economy. Earning dividends through a market drop and recovery helps you come out of the next recession ahead of the game.
I personally think we are two to three years or longer out from the next economic slowdown. I could be wrong. If you believe the next recession is right around the corner, or out in the more distant future, it would not hurt to have some dividend-paying, recession-resistant investments in your portfolio. Here are three to consider.
When the economy runs into trouble, it affects individuals who can lose jobs, see pay cuts, or even not be able to make house payments. Young workers may move back in with the folks. These individual problems are good for local self-storage locations.
Extra Space Storage (EXR) owns or manages over 1,700 self-storage properties with 134 million rentable square feet.
EXR is a real estate investment trust, which means it must pay out the majority of net income as dividends to investors.
This company is conservatively managed, with a focus on growing the dividends paid to investors. The EXR dividend has grown 91.5% over the last five years.
In a recession, Extra Space will be able to keep its properties fully rented and also be able to buy additional properties that are less well run. EXR currently yields 3.1%.
Even in tough times, people will find the money to pay their utility bills. Utility stocks are viewed as a safe haven by stock market investors, and the belief is justified. These are the highly-regulated companies that provide electric power, natural gas, and water to homes and commercial customers.
The regulatory agencies approve the rates of utility charges. Rates are set so that the utility can cover the infrastructure spending to maintain and upgrade its assets and then earn a fixed rate of return above the necessary capital spending.
The locked-in regulated profit margins give a high level of cash flow predictability.
For this market sector, I like the Reaves Utility Income Fund (UTG). This is a closed-end fund that owns a diversified portfolio of utility and related stocks. Reaves Asset Management focuses only on utility and infrastructure stock investments.
UTG has paid a dividend every month since it launched in 2004. That means it operated through the last recession and bear market. The dividend has never been cut and has been increased 11 times. UTG currently yields 6.0%.
Grocery stores are another recession-proof industry. To cover this industry and earn dividends, I like REITs that earn most of their revenue from grocery store anchor tenants.
Brixmor Property Group (BRX) owns 421 open-air shopping centers. The company focuses on shopping centers that are the focal center of their communities. Anchor tenants are the main revenue drivers for Brixmor, and 70% of those tenants are grocery stores.
The REIT pays out just 59% of funds from operations (FFO), meaning the dividend is secure. The payout to investors has grown by 7% per year. The current yield is 5.5%.
This grocery focused REIT will help you pay for the groceries through the next economic recession.