How to Find Recession Proof Stocks

Credits to Nilus Mattive

Global shipping is grinding to a halt; consumers are hunkering down again; manufacturing measures are indicating a new slump in activity; and even China’s red-hot economy is now a bit less robust according to Beijing!

In short, now is the perfect time to revisit the areas of the stock market that traditionally hold up best when recessions strike. These are the very same areas that I’ve been emphasizing all along, even during the manic rally, and the very same groups of stocks that you should look at right now as storm clouds roll back over the economic landscape.

Before I get to the specific sectors and industries, however, I first want to note that I suggest sticking only to stocks that pay dividends at this point.

Reason: By their nature, income-producing stocks are a reliable way to weather all types of market hurdles and get non-refundable returns along the way. 

Better yet, they tend to hold up much better than non-dividend-paying stocks … no matter what sector or industry you look at.

In 2002, for example, non-dividend stocks in the S&P 500 lost 30 percent while dividend-payers lost only 11 percent … and even during the height of the financial crisis in 2008, dividend payers outperformed by a full six percentage points.

Things Get Even Better When You Focus on The Right Dividend Stocks in Certain Parts of the Market
Many of the very same companies that pay the biggest dividends also provide products that people buy even when times are tough. Examples? Pharmaceuticals, electricity, and food.

And according to data from Standard & Poor’s, these are precisely the groups that have outperformed in past recessions.

Overall, the S&P 500 has lost an average of 21 percent during past recessions (excluding the latest one).
blackhalfarrow Where to Find Recession Proof Stocks The average utility stock lost 15 percent and beat the market in 9 out of ten past recessions…

blackhalfarrow Where to Find Recession Proof Stocks The average health care stock posted a 7.3 percent decline and outperformed the market in 80 percent of the recessions, and…

blackhalfarrow Where to Find Recession Proof Stocks The average consumer staples stock lost just 2.4 percent, beating the market 90 percent of the time.

Average Stock Performances in Past Recessions

Yes, even the best-performing sector posted a loss … but if we get even more specific we can find pockets of companies that tend to gain ground even during economic slumps.

For example …
Alcoholic beverage makers not only beat the market in 80 percent of recessions prior to this one, they actually rose an average of 6 percent …

Household products manufacturers posted a gain of 1.8 percent and outperformed in every single instance, and …

Tobacco companies rose 9.6 percent and beat the market every time.

I can tell you from real-world experience that these trends have held through “The Great Recession,” too!

For example, tobacco company Altria produced a total return of 15 percent from my first recommendation on July 2, 2007 through May 28, 2010.

Now, are these hard-and-fast rules? Of course not. Just because a company operates in one of these traditionally recession-resistant industries doesn’t guarantee that its stock will go up (or even hold its ground).

In addition, there are some companies I consider great recession plays that operate outside these traditional safe havens — even in technology and retail!

But my point today is simple: Even if the economy continues to weaken from here, you do not have to completely abandon the entire market, especially if you’re looking for steady income.

RobustMind: This article is based on the situation in U.S. of A., but i don’t think that there are much differences here in Malaysia. There are indeed some stocks that have been proven to be recession-proof stocks (mostly non-Syariah compliant). For me, I would focus on companies that have been making profit for the last 10 years with good dividend policy.

MAMEE is one of those stocks which is also a Syariah compliant counter. With its current all-time high price, I believe that this stock will be able to go further as they are expanding their business overseas. Other good dividend counters would be YTL Power International and Wellcall Holdings. Even though the dividends are not as good as those sin stocks counters, these are good alternatives for Muslim investors looking for Syariah compliant stocks. Another sector that is worth to take a look is the REIT stocks. Axis Reit, KPJ’s Al-Aqar Reit and Boustead Hadharah Reit are examples of Syariah compliant REITs.

REITs counters are good counters because they tend to pay more dividend than other stocks, but the price of the stocks are not as volatile as normal stocks. Investors normally use REIT stocks as defensive stocks and they keep it for its dividend, rather than for capital increment.

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