Stocks, Bonds, or Real Estate: What’s the Best Way to Prepare for a Recession?

Recession worries could push investors to bonds.

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Global growth is weakening. Consumers are cutting back on spending which is pushing companies to lay off workers. Unemployed workers, in turn, spend less, which creates a vicious cycle that could lead to a recession. 

An economic downturn isn’t set in stone, but the likelihood is steadily increasing. Investors need to prepare right away. But picking the right safe haven is tricky. Here’s a look at which asset class could be safest. 


Canada’s stock market is dominated by financial and energy companies. The top five holdings in the iShares S&P/TSX 60 Index ETF (TSX:XIU) are all banks and oil producers. On paper, these stocks look cheap.

The fund is trading at a price-to-earnings ratio of 14.77. However, that ratio could be deceptive. Earnings could drop in a recession. Consumers could default on the loans and mortgages banks have provided while demand for energy is tamed in a downturn. The fund could see some downward pressure if the economy dips. 

It’s also not a great option for passive income. XIU’s dividend yield is just 2.8%. That’s well below the rate of inflation. In fact, it’s lower than the dividend rate on bonds. 


The Canada 5-Year Government Bond offers a 3.18% dividend yield. That’s higher than the average dividend yield of the 60 largest companies in the country. Bear in mind that these government bonds are much less risky. The rate is fixed for five years and is backed by the Canadian government. 

If you’re looking for a higher yield, consider Guaranteed Investment Certificates (GICs). Equitable Bank (TSX:EQB) offers 4.6% annual interest rates for GICs ranging from five years to 10 years. That’s a fixed, guaranteed return for a decade that is likely to be much higher than the dividend yield on stocks. In fact, it could also be higher than the net rental income on investment properties. 

Real estate

The rental yield in Canada is already unimpressive. The average household income simply isn’t high enough to compensate for overvalued residential real estate. This is why real estate investment trusts like Canadian Apartment Properties REIT (TSX:CAR.UN) offer unattractive dividend yields. CAPREIT’s current yield is just 3.3%. That’s lower than the government bond and GICs discussed above. 

Rents are also subject to change. If we face a recession and higher unemployment, landlords like CAPREIT could see higher occupancy levels and lower returns. REITs have cut dividends during previous recessions, so investors should take the current dividend yields with a grain of salt. 

Bottom line

Investing during recessions is difficult. Investors must weigh potential returns against possible risks. At the moment, the safest risk/reward balance seems to be in bonds. GICs and government treasuries offer fixed returns for multiple years that are above dividend yields. Investors should consider parking some cash in these instruments as a safe haven. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends EQUITABLE GROUP INC.

More on Investing

Supermarket aisle with empty green shopping cart

$183 for Toilet Paper and Cups: Why We Love Costco Stock

"I literally went up there to get two things."

Read more »

A worker gives a business presentation.

TFSA Investors: 2 Top Stocks to Buy Before They Rally Any Further

Although plenty of top Canadian stocks have been rallying recently, these two still offer great value and are perfect for…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

3 TSX Stocks With High Dividend Yields

Are you looking for a great opportunity to bolster your portfolio? Here are three TSX stocks with high dividend yields.

Read more »

financial freedom sign
Stocks for Beginners

1st-Time Investors: 2 Cheap Canadian ETFs to Buy for Financial Freedom 

Investing for the first time but don’t know where to start? Here are two cheap Canadian ETFs that can grow…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Oil pumps against sunset
Energy Stocks

2 Top Canadian Energy Stocks to Buy Offering Dividend Yields Above 6%

These two top Canadian energy stocks are excellent long-term investments and offer unbelievable dividend yields if you buy them today.

Read more »

Target. Stand out from the crowd

4 TSX Stocks I Own and Will Buy More of if They Fall

These are my four top choices of TSX stocks that may dip in the future, but will pay me back…

Read more »

Dollar symbol and Canadian flag on keyboard
Stocks for Beginners

The 2 Best Canadian Stocks for Beginners Right Now

Stock market beginners in Canada could kickstart their investing journey by buying these two stocks right now.

Read more »