Are you an RRSP account holder worried about the effect of a possible recession on your holdings?
You’re right to be concerned.
During recessions, almost all stocks tend to fall. Sure, they recover eventually, but the closer you get to retirement age, the fewer downturns you can wait out. Particularly if you’re retiring very late in life, or close to RRSP mandatory withdrawal time, you really can’t afford to sit tight through a recession.
For this reason, many investors move into bonds as they get closer to retirement age. Bonds provide stable income, after all, and they’re less subject to the vicissitudes of the market than stocks are.
It’s true that bonds, particularly short term bonds, are the absolute safest bet for a recession. However, there are certain TSX stocks primed to perform well in recessions as well. The following are three of them.
Fortis Inc (TSX:FTS)(NYSE:FTS) is a utility company that serves customers in Canada, the U.S., and the Caribbean. It has a long track record of dividend increases, with 46 uninterrupted years of maintaining its payout.
There have been several recessions in the past 46 years, and a company raising its dividend every year that entire time implies that they raised it even during recession years.
That’s exactly what Fortis has managed to pull off. It wasn’t because of recklessly high payout ratios either–Fortis has always kept its payout ratio in the 60-70% range. Rather, it was able to raise its payout because it has historically had stable earnings during recessions.
For example, in 2009, as the late 2000s recession was running wild, the company increased its earnings by 17%. It’s all thanks to the “ultra stable” nature of the utilities business.
Heating is one of the bare essentials of life, and most people would sooner cut off their TV service than go cold. As long as this holds true, Fortis will be able to continue delivering value to shareholders.
Dollarama Inc (TSX:DOL) is Canada’s biggest dollar store with an 18% share of the discount retail sector. Note that discount retail is a broad category that includes any low-priced retail store (e.g., Wal-Mart). If we narrow things down to just dollar stores, Dollarama’s market share is even higher.
Historically, Dollarama was a huge grower, increasing its earnings by 20% or more year after year. Growth has recently slowed, however. The company’s net income increased by just 7% in the most recent quarter, and 6.5% the quarter before that. That kind of growth may not justify a P/E ratio of 27.
However, the company’s stock may still be a good defensive play for recessions. During recessions, people tend to cut costs, and Dollarama has some of the lowest prices in Canada in many product categories. For that reason, the company’s stock may see a boost as the economy takes a dip.
Similar to utilities, telecommunications companies tend to fare reasonably well in recessions. People would cut their internet before they’d cut out heat and light, but the former is still a fairly indispensable service.
A 2009 study from the U.S. found that, during the great recession, customers opted to trim down their service by getting rid of add-ons, instead of cutting the cords completely.
This is one reason why BCE’s stock may do OK during a coming recession. Its revenue stream isn’t quite as recession-proof as Fortis’, but it’s close.
From 2007 to 2009, the company grew its revenue from $17.6 billion to $17.7 billion. That’s meagre growth, but remember that this was a time when many companies were seeing declining revenue or even losses.
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 Andrew Button has no position in any of the stocks mentioned.