Fears are rising that there could be a recession headed for North America. If that does happen soon, investors should look at how to best protect their portfolios in preparation. Some stocks will be hit harder than others during a recession, which is why investors should be thinking ahead.
The good news for investors with TFSAs is that there are some quality dividend stocks that they can invest in that could be helpful in generating cash flow during a downturn. By investing in a relatively safe segment, they won’t have to take on too much risk.
REITs are safe, but retail may be too risky
A stock like Riocan Real Estate Investment Trust (TSX:REI.UN) is a good option for income investors, but the REIT has a lot of exposure to retail. Although it often houses some big names at its locations, that doesn’t mean that there isn’t risk.
After all, we’ve seen some big names in the world of retail fall in recent years. From the failed Target expansion in Canada to Toys “R” Us nearly collapsing in the U.S. and Forever 21 being the latest to announce that it would be closing its stores, retail has been anything but safe.
While the company boasts an occupancy rate of over 97%, it could quickly change should a retailer suddenly announce that they’re exiting the industry. It’s enough of a concern that Riocan has begun looking at different, hybrid approaches to the traditional mall layout.
Riocan is a great example of a stock that offers a good dividend, which is currently yielding around 5.4% annually, but that may have too much risk heading into a recession.
If more retailers shut down, that could not only impact Riocan’s occupancy rates, but also lower demand, resulting in rents coming down in price as well.
A safer option
One stock that may be a better option for investors is NorthWest Health Prop Real Estate Inv Trust (TSX:NWH.UN). As the name suggests, the REIT is focused on healthcare properties, which should provide investors with a lot more stability. Some examples of what’s in NorthWest’s portfolio: clinics, hospitals and medical office buildings.
Many of those properties wouldn’t be easy for a tenant to just move to a cheaper location, nor would it be likely that they’d close up shop during tough economic times.
As a result, it creates a lot of stability and investors don’t have to worry about retailers closing down, as it won’t have nearly as big an impact on NorthWest as it would on Riocan.
Another way that NorthWest gives investors protection from a recession is that many of its properties aren’t even located in North America. With locations in Australia, New Zealand, Germany, and Brazil, NorthWest has less exposure to the Canadian market than does Riocan and other REITs.
If economic conditions worsen in Canada and the value of the Canadian dollar falls, it could have a positive foreign currency impact on its financials when translating income earned in other parts of the world.
With a dividend yielding 6.8%, NorthWest could prove to be a good investment for dividend investors by offering both a good payout as well as a good layer of security against a possible recession.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. NorthWest Healthcare Properties REIT is a recommendation of Stock Advisor Canada.