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How to Recession-Proof Your Portfolio

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Canada’s economy is in a recession. It’s just a question of how long — and how severe — the downturn will be. Based on where we are at that time, it pays to be defensive and hunker down for the worst-case scenario. Below are three stocks that are at the top of my list to recession proof my portfolio.

People will need a place to live

Even in a recession, Canadians need a place to live. One way to get defensive exposure to the housing sector is via a multi-family REIT.

While much of the REIT sector has been heavily sold off, with retail and hotel names leading the declines, multi-family operators have fared much better thanks to their inherent stability.

One name that stands out is Canadian Apartment Properties REIT (TSX:CAR.UN), Canada’s largest multi-family landlord, with a diverse portfolio spanning our country as well as parts of Europe.

Aside from its size and diversification, CAPREIT also boasts a 98% overall portfolio occupancy, as well as debt to gross book value of just 35%.

This means that liquidity should not be a concern for the REIT during times of trouble, especially as over 98% of its mortgages are backed by the CMHC, and lenders will be more than happy to refinance their mortgages as they become due.

More info on CAPREIT can be found here

Stock up for the long haul with grocers

Consumer staples are another hallmark of a defensive portfolio. If you’ve ever shopped for groceries, chances are you’ve visited a store under the Loblaw Companies’ (TSX:L) umbrella. As the largest Canadian food retailer, Loblaws is the parent company of such ubiquitous brands like Superstore, Shoppers Drug Mart, T&T and Independent.

Despite its size, Loblaw is by no means stagnant. For its last fiscal year, food retail same-stores growth of 1.1%, and drug retail same-stores growth of 3.6%. While the pharmacy segment exhibited faster growth, food retail should catch up, as Canadians rush to stock up on bulk purchases.

Furthermore, with 2019 free cash flows of $1.2 billion, Loblaws has ample funds remaining after capex to pay out its dividend.

More info on Loblaws can be found here.

Heat and water

Finally, no defensive portfolio would be complete without a utility name. Luckily, here in Canada, we have no shortage of high yielding, stable names with strong protective moats. Fortis Inc (TSX:FTS)(NYSE:FTS) is one such company, with an enviable track record of 46 consecutive annual dividend increases.

Fortis is able to fund such returns to shareholders thanks to its well protected $28 billion rate base, which serves over 3.3 million customers across Canada and the United States. Furthermore, Fortis has ample liquidity to weather the economic downturn.

Debt maturities for 2020 total less than $500 million, and an undrawn $4.3 billion credit facility provides a safety net in the unlikely event the company’s cash flows are not enough to meet its obligations.

For more on Fortis, visit this link.

The bottom line

No one has any idea as to how long this economic downturn will last. Instead of trying to time the market, investors are better served to beef up their portfolios with defensive names.

The three companies in this article have held up very well during the selloff and offer portfolio protection along with stable dividends to weather this downturn.

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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 VMatsepudra has no position in any of the stocks mentioned.

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