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3 Stocks to Recession-Proof Your Portfolio

By Todd Campbell, Travis Hoium, and Tyler Crowe - Jul 30, 2019 at 8:01AM

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Owning these big-cap stocks the next time the economy sours could be profit-friendly.

The past decade has rewarded investors with remarkable returns, but investors might not want to underestimate the odds that an economic recession could be looming. The average period of economic growth lasted just 3.2 years up until 2009, and that data alone could suggest this bull market expansion has gotten a little long in the tooth. If you're concerned the economy is on borrowed time, then here's why adding Waste Management ( WM -3.69% )Brookfield Renewable Partners ( BEP -0.25% ), and McDonald's ( MCD -2.28% ) to your portfolio could be wise. 

This trash stock is a recession-proof treasure

Tyler Crowe (Waste Management): There are few things more recession-resilient than our propensity to throw stuff away. The need to properly handle and dispose of refuse during the good times and bad make Waste Management one of the best stocks to own for decades when the market is expanding or receding.

A man in a suit holds an umbrella over a pile of $100 bills.


The business model for waste handlers is one that has an incredibly wide economic moat. It tends to have geographic monopolies thanks to the challenging permitting process of opening and operating a landfill. It's also an immensely capital-intense business to run both a landfill and a fleet of waste collection vehicles. On top of that, it's the epitome of a recurring revenue model. 

Those inherent traits of the waste collection and disposal business can make a great investment if a management team can turn those traits into a high rate of return, and Waste Management does that in spades. It isn't a high-growth industry, but Waste Management's executives have used a steady diet of dividends and share repurchases to turn its stock into a compounding machine. 

WM Dividend Chart

WM dividend. Data by YCharts.

With a price-to-earnings ratio of 26 times, shares of Waste Management aren't cheap, but they aren't overvalued, either. That's especially true when you consider how well the company has delivered long-term value to shareholders over the years. If you are looking for a stock that will get you through the good times and the bad, Waste Management should be near the top of the list.

An energy stock that's ready for anything

Travis Hoium (Brookfield Renewable Partners): The energy industry can be full of pitfalls from falling commodity prices to disruptive new innovations and even wildfires (yes, fires sent a company into bankruptcy this year). One of the biggest risks is a recession, which can cause damage to a portfolio as energy stocks deal with the fallout. But a yieldco like Brookfield Renewable Partners can mitigate some of those risks and keep a dividend coming in even the roughest of times. 

Brookfield Renewable Partners owns hydro, wind, and solar energy assets and sells the electricity they produce to utilities, normally on long-term contracts. In fact, the weighted average contract life remaining for the company's assets is 14 years, ensuring cash flow for many years to come. 

What's great about Brookfield Renewable Partners for risk-averse investors is that the company grows organically. The company aims to pay out 70% of funds from operations to investors, holding on to 30% in order to grow the company. That organic growth is expected to result into a 5% to 9% increase in the dividend long term. 

There are no guarantees about a stock's return, but being in the business of selling electricity to utilities under long-term contracts seems to be one of the safest options on the market. And with a 5.7% dividend yield to start from, this could be a steady stock with a big dividend payout for patient investors. 

A man sitting on a stack of books while pointing at diagrams written on the wall behind him.


A winner through good and bad times

Todd Campbell (McDonald's): We all need to eat and perhaps that means there's no better Goldilocks stock for a good or bad economy than McDonald's.

The company's low-cost approach has historically helped insulate investors during bear markets and menu innovation and margin-boosting buying power have made McDonald's a winner during bull markets, too.

For instance, McDonald's shareholders saw its share price increase 5.5% when the S&P 500 lost 37% of its value in 2008 because of the Great Recession. And McDonald's shares have surged 364% since 2009, handily outpacing the 227% return for the SPDR S&P 500 ETF.

There's reason for optimism, regardless of what happens in the economy. McDonald's has experienced comparable sales growth worldwide in 16 consecutive quarters and ex-currency conversion headwinds, revenue grew 3% and adjusted earnings per share increased 7% in the second quarter of 2019.

Admittedly, there's no telling if McDonald's will do as well during the next recession as it did in the last one, but given its low-price offerings and power to negotiate deals with suppliers, I wouldn't bet against market-beating performance. If I'm right, then including McDonald's in your portfolio could provide peace of mind, especially since you'll pocket an annual 2.15% dividend yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$244.60 (-2.28%) $-5.70
Waste Management, Inc. Stock Quote
Waste Management, Inc.
$160.67 (-3.69%) $-6.16
Brookfield Renewable Partners L.P. Stock Quote
Brookfield Renewable Partners L.P.
$36.30 (-0.25%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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