Some of the best stocks on the stock market are recession proof investments, or companies that can perform well in a bear market. Each bear market is different, but include a major stock market crash, from the tech bubble bursting to the Great Recession of the financial crisis to this year’s Covid Crash.
But there are a few qualities that apply to recession proof stocks. They’re companies that are capable of growing their revenues and earnings over time, while also providing strong cash flows for dividend yields. They may not always be the most popular stocks on Wall Street, but when the going gets tough, they keep an eye out for their shareholders.
In today’s market, that’s a lot more encompassing than in the past, including some names in big tech. These are some of the top individual stocks for navigating the next bear market and saving your retirement portfolio:
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Best Recession Proof Stock #1: J.M. Smucker Corp (SJM)
Known as a manufacturer of preservatives, the J.M. Smucker Corp (SJM) has grown tremendously over the past few decades. It has made strategic acquisitions in coffee, buying up the Folgers brand, the most popular coffee brand in America.
And in the past few years, it’s branched out into pet food as well. Overall, the company has over a dozen brands that it sells to food retailers nationwide. It’s a perfect one-stop “stay-at-home” food play. That’s shown up in the company’s earnings this year as consumers have indeed scaled back on their dining out.
Of course, we like the company for its steady dividend history as well. Currently, the company is paying out 51 percent of its operating income in the form of dividends, a healthy ratio. And at $3.52 annually, shares currently yield about 3.4 percent.
The company has a history of growing its dividend over time, but it has been known to do so a bit unevenly. That keeps dividend aristocrat investors away from this particular name. But with a reasonable dividend likely to grow at some point, shares look like a solid play here.
That’s also true relative to the rest of the packaged food space, where other companies that have made big acquisitions have had to acknowledge that they’ve overpaid. So far, that seems far from the case with J.M. Smucker.
And dividend investors can do even better here. Why? Because over the past few years, shares have tended to drop under $100 briefly before surging higher to the $130 area.
This range-bound trading means investors buying today can likely see 25-30 percent capital gains within a year or two, then they can sell shares and wait to buy back at the lower end of the range. And with a growing dividend along the way, albeit at a slow pace, adding in some market timing can create great returns in a recession-resistant stock.
Best Recession Proof Stock #2: McDonald’s (MCD)
Although the restaurant industry has been hard hit in 2020, fast food companies have seen traffic hold up relatively well thanks to drive-thru operations. One of the biggest players has also been one of the top dividend stocks of all time.
McDonald’s (MCD), with its golden arches, hardly needs an introduction. The company has over 38,600 locations, largely owned by franchisees. The franchise model allows the company to be large while spreading the risk of ownership down to local owners.
That’s a great business model, as it means net income largely passes through to the corporate level. And its focus on low prices is why it was one of two Dow companies to see its shares rise during the Great Recession.
Right now, shares are paying out $5 per year. That’s up from $4.82 in the past year. Overall, the company has done a great job of growing out its dividend payments.
Although the current dividend yield of 2.6 percent doesn’t look terribly large, the dividend growth behind the company and share price appreciation still makes this a great play.
Whether the economy is expanding or contracting, McDonald’s is a steady player, making it a top dividend play for today’s uncertain environment.
Best Recession Proof Stock #3: Coca-Cola (KO)
One of the best-known brands on earth, it’s no surprise that Coca-Cola (KO) has long earned blue chip status. While the company is known for soda, it’s really a beverage giant with brands in the coffee, tea, and even bottled water space as well.
Coca-Cola is the number one company by sales in every category it competes in, except for energy drinks, where it’s still growing out its sales.
With one of the largest networks for delivery, Coca-Cola products are available nearly globally. Together with second-place industry player Pepsi, the two companies control 70 percent of the market.
Coca-cola has been a key blue chip stock, with dividend growth over the past 57 years. While the growth rate has been in the single-digit range annually, over time the rising dividend payout of shares has allowed the share price to provide massive stock appreciation.
It’s a classic example of how a great, but already large company, can continue to deliver excellent returns over time to investors while being a dividend king. Any stock with a history of dividend increases is a potential blue chip play in the making.
Shares often trade at a premium to the market, but right now the stock price relative to earnings is more in-line with the market. That’s a relative valuation to this blue chip giant, and one that makes it worth investing in right now.
Best Recession Proof Stock #4: Apple (AAPL)
The blue chip darling of consumer technology, this industry-leading giant is likely to maintain its lead for years to come. The company is simply a living legend. Over the years it has innovated in personal computing, smartphone technology, and even owns the world’s highest-profit-margin music store with iTunes.
It’s no wonder you can find shares in just about any mutual fund or ETF. But that’s for a reason.
So, yes, it’s a pricey company. And it carries a market capitalization of nearly $1.5 trillion right now. But this is a company that’s likely going to continue being a long-term winner thanks to its relentless focus on growth.
Despite having to pay for a lot of costly manufacturing for its physical goods, the company has a 21 percent profit margin and operating margins of 24 percent. That’s closer to a purely-tech play like a software company than a firm best known for making smartphones.
Earnings growth has slowed out in recent quarters, putting it ahead of some of the dire headlines about the economy right now. But that’s what makes it a time to buy—a fact many traders have already recognized, and why shares still trade near all-time highs.
No matter what happens in the economy, consumers will still download music from the store. And they’ll still need to upgrade their iPhones on a regular basis. And with newer technologies and services in television and screening coming along, there’s still a lot of profit opportunity ahead. The stock returns here will likely continue to beat the market.
Shares even offer a dividend payment, albeit a low one just under 1 percent. But given how much the shares move in a given year, and the company’s already strong record of dividend growth and share buybacks, today’s investors are likely to continue to see excellent returns buying and holding one of the best recession resistant stocks.
Best Recession Proof Stock #5: Clorox (CLX)
A manufacturer and producer of household products, Clorox (CLX) is best known for its various cleaning products. Its brand is so strong that the company name is often synonymous with bleach.
But it also has household goods such as charcoal briquettes, cat litter, and even food products such as sauces and dietary supplements. These are the kinds of goods that don’t see a surge in demand during an economic expansion, nor a massive drop in demand during a recession. That makes for a safe stock in most market climates.
In short, it’s more than just a play on cleaning supplies. And that makes it a great play both now, and going forward. No matter how the economy performs, the company’s products will always be in demand.
Shares pay out a dividend yield of 2.1 percent. On the whole, that’s just barely above the market average, just under 2 percent. But that doesn’t tell the whole story.
The company has been growing its dividends every year for the past 42 years. It most recently raised its annual payout from $4.24 annually to $4.44—an increase of 4.7 percent.
Because inflation in recent years has been closer to 3 percent, the company’s payouts are actually increasing in real terms. That means shareholders are getting more and more money in their pockets each year just for owning shares. So while the current yield is low, today’s investors are likely to see their dividends grow handily over time.
Best Recession Proof Stock #6: Home Depot (HD)
Home Depot (HD) is a home improvement retailer with over 2,200 locations in the United States and elsewhere. At a time when many traditional retailers have struggled, Home Depot has managed to maintain a long-term growth trend.
The company boasts a 9.8 percent profit margin, higher than other big-box retailers, particularly grocery stores. Why? In addition to being a low-cost provider of home improvement supplies, Home Depot also offers tool rentals and installation services. Add-ons such as this are high-profit-margin areas and could help fuel the company’s growth even further.
That’s also been evident from the company’s dividend. In the past year, the company yet again raised its payout to a full $6 per share from a previous dividend of $5.72 per year. That’s a 4.8 percent increase in the dividend, a very attractive and reasonable growth rate.
At current prices, shares offer a 2.4 percent dividend yield. That yield may fluctuate, but chances are the total dividends per share will continue to increase in time.
That’s because the company has an excellent long-term history of growing its dividend. What’s more, the dividend payout ratio is a mere 55.6 percent of current earnings right now. So there’s clearly some room for the dividend to continue growing over the next few years, even in a sluggish economy.
Best Recession Proof Stock #7: Microsoft (MSFT)
Microsoft (MSFT) is a tech giant to say the least. If you’re still thinking of it as a provider of operating systems for computers, you’re only getting a fraction of the picture.
The company is heavily invested in a number of next-generation technologies, to say nothing of having its own video game console (the Xbox), video communications (Skype) and social media site (LinkedIn).
What’s most impressive is the company’s growth in cloud services. That’s a huge potential market, and Microsoft has quickly built out its functionality there to compete with the likes of Google and Amazon.
All in all, this makes for a fascinating tech conglomerate that’s focused on being the best or second best in a few areas that have high revenue potential. Most investors have no clue that video game sales exceed box office sales for moves—and that first occurred in 2018, well before the pandemic.
Microsoft has been a fast adaptor to the times, increasing tools and functionality to the work-from-home workplace. This is a company likely to benefit from accelerating trends in technology in the years to come. That means this behemoth can get even bigger.
And right now, shares also pay a 1 percent dividend yield. It isn’t much compared to the share price, but over the past few years the company has been consistently increasing that payout, and its payout ratio remains low enough to ensure dividend growth will continue for years, making for a fantastic, recession-proof, blue chip play right now.
Best Recession Proof Stock #8: American Express (AXP)
Trading at just 13 times earnings, American Express (AXP) is a powerful brand.
It’s part of an oligopoly in the credit card network space. That’s the kind of business model worth owning in any economic climate.
Compared to peers, American Express focuses on more upscale customers. While they tend to spend less during a market downturn, they tend to be the first to ramp their spending back up. That makes it a great company to own into a recession, when fears of reduced consumer spending are at their highest.
While many cyclical stocks in the broader market are pushing the market price to all-time highs, shares of American Express are still off by 26 percent. That’s in spite of strong cash flows, even as the company reported substantially reduced earnings on lower consumer spending in the first half of 2020.
American Express has endured a number of economic conditions and recessions, and it has a strong balance sheet to last through current woes and thrive again.
Investors who buy shares now can pick up a world-class company at a value price, as well as a 1.8 percent dividend yield that the company has a history of regularly increasing every year.
Best Recession Proof Stock #9: Wal-Mart (WMT)
As America’s foremost discount retailer, Wal-Mart (WMT) tends to pick up market share during recessions as consumers shop at less expensive locations. It was one of two companies in the Dow to see its share price rise during the Great Recession.
But the big box retailer has also spent billions of dollars over the last several years on expanding grocery operations, as well as building out an online presence that could compete against digital juggernaut Amazon.
And that looks successful. Wal-Mart has seen a massive surge in physical and online traffic as consumer spending downshifted at the start of 2020. That’s allowed it to compete with Amazon with much better value.
WMT stock is now up nearly 20 in the past year—which sounds like a slow year, but with the S&P 500 relatively flat, the company is once again shaping up to be a solid recession-resistant play.
And with over half the company’s shares owned by insiders, mostly the Walton family, the company’s long-term interests are aligned with shareholders.
This is another dividend growth play, which works perfectly with a long-term mentality. Today’s starting dividend of 1.8 percent isn’t that much, but the company has been growing its dividend over time, and maintains a healthy 50 percent payout ratio. That leaves plenty of capital for more investments in online and remote spending needs, revamping stores, or training and paying personnel.
Stocks like Wal-Mart, bought and held for long periods of time, make investing look easy.
Best Recession Proof Stock #10: AT&T (T)
For investors thinking ahead years, not months, there’s a lot to like about AT&T (T). As a telecom company, its heavily regulated structure leads to steady and predictable earnings.
While that usually means slow earnings growth, the company has expanded in recent years with acquisitions of DirecTV and Time Warner.
That means the company has the infrastructure to deliver the content that it’s now creating. This vertical integration gives it a competitive advantage over pure content creators or pure information infrastructure providers.
The acquisitions should be accretive in the long term, and the company has already started to pay down its debt more rapidly thanks to its massive cash flow. For the moment, however, the balance sheet does look a bit leveraged, which has kept the share price down.
At the same time, the company pays a generous dividend, with a yield over 6 percent right now. There’s been some growth there, although not much.
With a high starting yield and the company’s debt picture improving, however, chances are today’s buyers who plunk down the funds will be well paid. And they’ll see solid capital gains in the years ahead with this company, given the disconnect between its value now and the market price.
What Stocks do Best During a Recession?
Every recession can be different, but companies that focus on low-income products or services tend to fare the best. Think Dollar General or TJX, not Neiman Marcus. Think Altria, not Tiffany’s. Companies that can also offer a new path to growth that plays towards solving the cause of the current economic recession can also be great investment plays as well. There’s really never a bad time to load up on these kinds of stocks in your portfolio.
What Companies do Best In a Recession?
Defensive stocks that aren’t dependent on a small customer base tend to fare best during a recession. That’s why telecoms, utilities, consumer staples products like Altria, chain retail stores and the big tech stocks have been some of the best performers during the past few recessions. Even if their shares get hit in a bear market, their operational pe1rformance is likely to improve as these companies rise to meet the challenge of the current recession and get into the next bull market.
What are the Safest Stocks to Invest In?
Traditional investment advice suggests that the safest recession plays are in areas like telecoms, consumer staples (including cigarette stocks like Altria or health products like JNJ), and utilities. These areas offer decent valuations, above-average income potential from dividends and generally hold their own during a weak economy. They’re also well-established companies that can pay out cash dividends, so there won’t be any penny stocks here.
What Businesses do Best in a Recession?
Any business with low debt, moderate profit margins, and a large customer base that can grow over time should do well no matter what the economy does. That’s why a number of sectors are increasingly looking strong in recessions. Traditionally, defensive sectors include utilities, telecoms, and consumer staples, but today’s economy also includes technology and some retail plays as well, for a strong recession resistant portfolio.