In 2020, it’s clear that we’re headed into a global recession. The COVID-19 pandemic has decimated industries like air travel, sending most countries’ GDP numbers into contraction territory. Just recently, China reported a GDP contraction for the first time in recorded history.
The U.S. gross domestic product, meanwhile, fell 4.8% in the first quarter. The U.S. figures are particularly striking because that country only entered lockdowns in March.
In an environment like this, it’s easy to get nervous about your retirement. While stocks have been rallying lately, they’re still down from their previous highs, and other income sources (like part-time jobs and real estate rentals) are under pressure too. Faced with this, it would be easy to throw in the towel and take CPP earlier than you had planned.
But you don’t need to resort to that just yet. As you’re about to see, there’s one type of investment that has made it through this crisis unscathed and is unlikely to suffer serious harm this year. By getting more exposure to this asset class in your RRSP, you can establish a steady, reliable income stream.
So, what is this asset class, and why is it so good for recessions?
Utility stocks
Utility stocks, along with bonds, are among the safest assets in economic downturns. Utilities are a basic necessity of life, similar to groceries. So even when consumers are feeling the heat, they don’t tend to cut the service out of their budget.
While they may cut down on electricity consumption, they won’t cut it out entirely. So the utilities’ revenue streams are unusually stable in economic downturns.
For this reason, they’re often considered “bond alternatives”: stable dividend plays keep paying you even when times are tough.
Some solid picks to consider
If you want to”recession proof your portfolio with utility stocks, one pick you could consider is Fortis Inc (TSX: FTS)(NYSE: FTS). One of Canada’s most stable companies, it not only survived the 2008/2009 recession, but actually grew its earnings in the period.
During that recession, Fortis upped its dividend each year the economy was contracting. In fact, it has increased its dividend every year for 46 years running.
This is the kind of stability you can get with utility stocks. Thanks to their highly regulated essential services, they can pay dividends more reliably than any other class of equities.
As well, they offer dividend growth. Over the next five years, Fortis is aiming for dividend increases of 6% a year. With regulated rates and several expansion plans in the works, the company could easily hit that target.
If you’re too risk-averse for individual stocks, you can also look at ETFs. With a utilities ETF like the S&P/TSX Capped Utilities Index ETF, you get a diversified portfolio of utilities that mitigates risk.
You do pay a fee for the privilege (approximately 0.64% with the ETF just mentioned), but that may be worth it to get high dividend income in a low-risk package.
Add some low risk bonds into the mix and you’ve got the beginnings of a truly recession-ready portfolio.
