We all know that a recession will come at some point in the economic cycle or sometime in the future. Since the stock market is a leading indicator, it might fall even before a recession looms over the market. Here are some of my favourite TSX stocks that I’m eyeing for recession planning.
Dividend stocks with sufficiently high yields
In The Single Best Investment by Lowell Miller, the author introduced the idea of targeting stocks with sufficiently high yields. Specifically, those are dividend stocks with dividend yields that are 1.5 times to two times the market yield.
At writing, the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, offers a cash distribution yield of close to 3.2%. So, I would target stocks with yields of 4.8% to 6.4%. These stocks should also have solid growth prospects, which should have a growth rate of at least 6-8% — two times the long-term inflation rate.
Brookfield Infrastructure Partners (TSX:BIP.UN) is a prime example of a quality dividend stock that fits the above criteria. In the last decade, it increased its cash distribution at a compound annual growth rate of approximately 8%, while increasing its funds from operations (FFO) at a faster rate. This means the top utility stock has been increasing its cash distribution sustainably. So far, it has reported three-quarters of results for this year with FFO-per-unit growth of 8.5% and an FFO payout ratio of 68%, which is within its target of 60-70%.
Brookfield Infrastructure owns and operates a large and diversified portfolio of critical infrastructure assets around the globe. Its assets help move and store energy, water, freight, passengers, and data. In the long run, it targets a market-beating return of 12-15% per year on its investments through a combination of acquiring quality assets on a value basis, enhancing its operations and assets, and selling mature assets whose proceeds can be redeployed into new investments.
At $40.31 per unit, the dividend stock offers a decent yield of 5.1%. It is committed to increasing its cash distribution by 5-9% per year. For your reference, its five-year cash-distribution growth rate is 6.6%. Through recessions, you can count on safe and growing income generation.
BIP.UN, CSU, and XIU 10-year Total Return Level data by YCharts
Low-yield stocks with high-growth prospects
Low-yield stocks don’t provide as much income as dividend stocks with sufficient yields, but they could provide higher growth. For example, Constellation Software (TSX:CSU) offers a tiny dividend yield of less than 0.2%. However, it has primarily directed its capital to make strategic mergers and acquisitions that have created massive wealth for long-term shareholders.
The company explains that it “acquires, manages, and builds vertical market software businesses. Generally, these businesses provide mission-critical software solutions that address the specific needs of its customers in particular markets.” This strategy has allowed it to make durable cash flow and revenue growth.
If you can find low-yield stocks with above-average growth driven by wonderful businesses, this group could prove to be more resilient during recessions than the prior group of higher-yield stocks.