There’s a growing chance that a recession will occur next year. In recent weeks, several surveys have indicated that both fund managers and economists believe a downturn is just around the corner. It’s been more than a decade since a true bear market has occurred, and it’s useful to remember what happened. Global markets around the world fell by 50% or more. Years of savings were wiped out. Millions lost their jobs.
While we can’t know the severity of the next recession, we do know that they can be devastating. Looking back, it seems obvious to buy stock at market bottoms. But at the time, not only was it difficult to pull the trigger, but most investors didn’t have a bunch of excess cash to deploy.
Those that avoided steep losses and then capitalized on rock-bottom prices became rich. Note the first step: avoid losses. You can’t buy more stock with money you don’t have. If you want your portfolio to sail through the next recession undisturbed, the following three stock picks are for you. If you’re brave enough, you can swap these picks for riskier names when the market bottoms, adding once-in-a-decade upside to your portfolio.
Recently, I called Hydro One (TSX:H) “the safest stock I’ve ever found.” My reasoning was sound. I described how “99% of Hydro One’s revenue is fully regulated, giving it a highly predictable cash flow stream that can be forecast up to five years in advance.” Which other businesses are guaranteed their revenues and profits five years in advance?
All Hydro One has to do is deliver electricity to its customer base. The company has been doing this without interruption since the early 1900s when it was known as the Hydro-Electric Power Commission of Ontario. Today, the stock delivers a 4% dividend, and regulated growth is locked in at roughly 5% per year. If the market falls, this stock should hold steadier than any other company on the TSX. Plus, you have a chance to earn a fully funded 4% dividend with a bit of earnings growth thrown in.
Growth no matter what
Renewables are taking over the grid, not because of subsidies or tax breaks, but due to simple economics. Investment bank Lazard produces a regular report on the state of renewables. The firm’s latest research shows how, over the last decade, the cost of utility-scale onshore wind and solar power plants has dropped between 70% and 90%. Rapid cost reductions have made renewables cheaper than natural gas and coal in many regions across North America. Nearly every year renewables get cheaper, driven by the declining cost of technology. At this point, they grew increasingly competitive by the day.
If you want to take advantage of this transformational shift, Brookfield Renewable Partners is the way to go. Its portfolio consists of more than 17,500 megawatts of renewable energy capacity produced by nearly 900 generating facilities in North America, South America, Europe, and Asia. Management aims to deliver “long-term annualized total returns of 12-15%.” Because 75% of its production is hydroelectric, which experiences very little disruption, this stock should perform well during a recession while delivering a 5% dividend.
Clearly, owning reliable energy assets is a great way to ride out a recession. Owning an energy monopoly is even better. That’s what you get with Inter Pipeline.
In a way, all pipeline businesses are pseudo-monopolies. They face very little direct competition, and due to the extensive timeline and cost burden to build new pipelines, they enjoy a wide economic moat. And because they typically price on volumes rather than commodity prices, they’re insulated from swings in the market.
From September 2008 through September 2009, the worst of the financial crisis, Inter Pipeline stock ended with a 2% loss. When including the dividend, stockholders actually generated a gain. If you want stability, own a pipeline company like Inter Pipeline.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Ryan Vanzo has no position in any stocks mentioned. Brookfield Renewable Partners is a recommendation of Dividend Investor Canada.