The best recession-proof stocks
Whether you’re worried about short-term troubles or just want a resilient portfolio that stands up to the unexpected, your approach to identifying the best stocks to buy should be similar.
Here’s what to look for when researching recession-proof stocks:
Avoid cyclical stocks. The economy tends to run in cycles, and some businesses do very well when things are booming but suffer mightily when recession strikes.
These are called “cyclical stocks” because they’re very sensitive to trends in business or consumer spending.
Think of hotels that depend on strong travel spending, automakers that sell high-price cars or retailers that rely on Americans taking frequent trips to the mall.
Stick to defensive sectors. Defensive sectors might not have as much upside when things are booming, but they tend to be more stable when things get tough.
Examples of defensive stocks include electric utilities and businesses that sell consumer staples such as soap and packaged foods. You don’t stop turning on the lights, showering or eating just because the economy is a bit rough.
Defensive stocks depend on strong baseline demand through the economic cycle.
Go bigger. It’s generally true that larger companies on Wall Street are more stable than smaller ones. They have cash reserves to fall back on, not to mention big brand names and rich histories.
They have what Warren Buffett characterizes as “moats” of safety to protect them from short-term disruptions.
Although smaller companies can move more quickly to take advantage of new opportunities, they’re usually among the first to suffer when times get tough. Going bigger helps reduce your risk profile.
Prioritize dividends. Large companies with stable profits often spread the wealth via regular dividends.
This flow of profits back to shareholders sweetens total returns, which is nice. It also establishes a level of reliability in underlying operations. Cutting dividends is a huge black eye for a stock.
A business that generates cash flow sufficient to support regular payouts — and, in the best-case scenario, backs one of those stocks known for dependable dividend growth — should give you confidence through the economic cycle.