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3 Top Stocks to Recession-Proof Your Portfolio

By Keith Noonan - Jan 29, 2020 at 7:35AM

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These companies beat the last recession, and they should be able to do it again.

The U.S. economy is still going strong, but there are a growing number of concerning events and market indicators that suggest the record period of economic expansion and almost 11-year bull market could be in jeopardy.

With the spread of the coronavirus accelerating and dominating the headlines, a sure-to-be contentious presidential election on the horizon, key global economies like Germany seeing their industrial sectors slip into recession, and much of the market's rally over the last few years being propelled by tax cuts and stock buybacks, investors should at least be weighing the possibility of a significant pullback for the market in the near future.

Finding stocks that are entirely resistant to a recession or market crash is difficult, but there are companies and industries that hold up better than others and can position investors to thrive even when times get tough. If you're looking for stocks that can help fortify your holdings against the threat of recession, consider these three dividend-paying companies.

A red chart line showing a downward slope

Image source: Getty Images.

1. The TJX Companies

Businesses tied to the brick-and-mortar retail space might not immediately spring to mind as great investments to recession-proof your portfolio. The market is being reshaped by e-commerce, and many formerly successful retail giants find themselves pressured by reduced traffic to malls and outlets and easy price-hunting online.

But some companies with a heavy brick-and-mortar imprint have competitive strengths that make them strong long-term plays. The TJX Companies (TJX 0.12%) is a retailer that fits that bill and has a history of recession-defying performance. It operates stores including T.J. Maxx, Marshalls, HomeGoods, and HomeSense, and the business is able to sell brand-name and hiqh-quality goods at a discount by snatching up inventory from other retailers that have excess inventory or suppliers that have overproduced. 

The Great Recession kicked off in December 2007 and lasted until June 2009, but TJX managed to post strong performance in each year of that recession and in the relatively weak economic conditions that followed. The chart below tracks the company's growth in same-store sales and revenue for the fiscal years ending in Jan. 31, 2008, through Jan. 31, 2011: 

A bar graph showing TJX's same-store sales climbing 1% in 2008, 6% in 2009, 4% in 2010, and 4% in 2011 -- with total revenue up 4%, 7%, 8%, and 6%, respectively, across the corresponding periods.

Source: The TJX Companies. Chart by author.

The company's net income climbed about 4.5% in fiscal 2008, 14% in 2009, 37% in 2010, and 8% in 2011, and the stock delivered a dividend-adjusted total return of 125.6% in the four-year period from the start of the last recession. Meanwhile, the SPDR S&P 500 ETF posted a total loss of 8.4% across the same stretch.

TJX's off-price business model allows it to draw in more budget-conscious shoppers during downturns and continue growing sales despite tougher economic conditions. Its annual same-store sales have only declined once in the last 44 years. The stock pays a dividend that yields roughly 1.5%, and the company has a 23-year history of annual payout growth.

2. Walmart

Walmart (WMT -11.38%) offers a 1.8% dividend yield at its current price and has a 46-year history of annual payout growth backed by one of the sturdiest businesses in the retail space. The big-box retail giant posted sales and earnings growth from fiscal 2008 through fiscal 2011, and it soundly outperformed the broader market across that stretch. 

SPY Total Return Price Chart

SPY Total Return Price data by YCharts.

The secret to Walmart's recession-defying performance is simple: low prices and an all-in-one shopping experience that none of its competitors can match. Granted, offers an incredible selection of goods, and there's no denying that e-commerce will continue to gain a greater share of the overall retail market. But the reach of online grocery ordering and delivery remain at a relatively early stage, and Walmart's substantial warehousing advantages mean that it will likely be a leader in that market when the service is more developed. 

Walmart is seeing strong momentum for its own e-commerce initiatives (including promising momentum for grocery delivery), and its comprehensive network of brick-and-mortar locations remains unrivaled in providing a place to buy lots of goods and services. Shoppers can pick up home and garden supplies, get their car's oil changed, transfer money, cash checks, and buy groceries and pet supplies at prices competitors have great difficulty matching. The company is even experimenting with offering a variety of health services at its stores.

Walmart's value stems from making it easy to save time and money, and the company's stock will likely post market-beating performance during the next downturn. 

Altria Group

Altria (MO 0.93%) boasts a hefty 6.7% dividend yield and has a leading position in the tobacco industry, a corner of the market that will likely prove to be relatively resilient when the next crash hits. The chart below tracks the tobacco giant's total return in the four years following the last recession.

SPY Total Return Price Chart

SPY Total Return Price data by YCharts.

Altria crushed the market on the heels of the Great Recession, and sales and operating income posted substantial gains in each of the four fiscal years in the comparison period.

While some stocks that outperformed the market during the last downturn have seen their valuations become somewhat stretched, Altria isn't one of them. The price of the SPDR S&P 500 ETF is up about 56% over the last five years, while Altria stock has fallen roughly 8% and trades at 11.5 times expected earnings in 2020. That underwhelming performance can be explained by declines for cigarette unit sales and the company's overpaying for investments in e-cigarette-maker Juul and marijuana company Canopy Growth.

On the other hand, the nature of the tobacco business suggests the company won't be damaged by an economic downturn. It has some interesting growth opportunities in the marijuana space, and the stock looks fairly cheap at present.

In addition to sporting a big yield and trading at a nonprohibitive earnings multiple, Altria also has 50 years of consecutive annual dividend payout growth under its belt -- placing it among the illustrious ranks of the Dividend Kings. Big yield, the addictiveness of its products, and a conservative valuation are positioning the company to outperform the market in tougher economic times.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$131.35 (-11.38%) $-16.86
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$54.24 (0.93%) $0.50
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
$56.19 (0.12%) $0.07

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

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