Recession-proofing a portfolio is difficult for a number of reasons, including the difficulty of predicting the triggers of a recession. If you don’t know what’s going to cause a recession or a market crash, it’s challenging to identify which sectors, market segments, and stocks will be safer and the ones likely to suffer the most.
It’s important to understand that even the most resilient stocks may survive a recession without a slump or fall. But they can still maintain their dividends, and that’s the return “dimension” that you might consider focusing on.
A utility stock
Utility stocks are among the most favourite dividend picks for a simple reason: sustainability. The business model of utility companies offers ample resilience against weak market conditions, including recessions. Fortis (TSX:FTS) expands on this strength with its stellar dividend history — it has 49 years of consecutive dividend increases.
Fortis has grown its dividends through the Great Recession, the 2020 market crash, and several other weak market conditions over the course of five decades. It’s currently offering its dividends at an attractive 4.1% yield, but that’s just one aspect of its return potential.
Fortis is also a modest grower — it’s grown 74% in the last 10 years. If you invest in this reliable utility stock, you may enjoy steady dividends during a recession and modest growth in a healthy market.
A railway stock
Canadian National Railway (TSX:CNR) is the largest railway company in Canada by market capitalization. It has an impressive network of over 20,000 miles that connect three North American coasts, which offers it a major supply chain advantage.
The railway network connects it to the U.S. and Mexico, making it a crucial element of the North American supply chain. It also controls an impressive trucking fleet, which expands its transportation reach beyond its railway lines.
It’s also one of the oldest dividend aristocrats in Canada and has grown its payouts for 27 consecutive years, which includes the Great Recession and the pandemic.
While it’s not as immune to recession and other weak economic conditions as a utility stock, Canadian National Railway deals with a diverse range of cargo, and coupled with a resilient business model, this allows the company to maintain, even grow, its dividends in a weak market. It also offers compelling capital-appreciation potential.
A bank stock
Canadian bank stocks are coveted for their high yields and sustainable payouts, and if it’s a high yield you are seeking, Bank of Nova Scotia (TSX:BNS) is the best pick from the banking sector. It’s currently offering a mouthwatering yield of 7.1 and is both discounted and modestly undervalued.
It’s also one of the oldest dividend payers in the country, with its history of dividend payouts stretching back to July 1833. It has also been growing its dividends for 12 consecutive years. This streak would have been much longer, but the banks had to pause their dividend growth during the Great Recession.
But even if it pauses the dividend growth in extreme market conditions, it hasn’t slashed or suspended its dividends for decades, making it a reliable dividend pick.
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Foolish takeaway
The three stocks can help you start a recession-resistant passive-income stream, so even if your portfolio sinks during a recession because the stocks are falling, you will not experience it in your dividend-based returns. If these returns are substantial enough, you can wait for the stocks to recover and avoid any potential capital losses.
