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Worried About a Stock Market Crash? Buy These Recession-Proof Dividend Stocks

By Neha Chamaria – Updated Oct 31, 2020 at 11:27AM

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These resilient dividend stocks are custom-made for you if you fear stock market volatility.

It's been a volatile year in the stock market. Several factors point at an imminent stock market crash, and the very thought is enough to make investors jittery. However, instead of panicking, it's time you prepare yourself and recession-proof your portfolio by adding some stocks that can withstand the storm.

How about buying some dividend stocks that can pay out stable dividends? This way, you can earn passive income even during a recession. If that sounds like a great idea, check out these three top recession-resilient dividend stocks right away. 

Dividend growth you can bank on

NextEra Energy (NEE -1.07%) is an incredible dividend stock to own at all times, as it offers the stability that comes with utility stocks -- much sought after during a recession -- as well as solid growth potential to power up your portfolio.

NextEra's core business includes its two electric companies that provide electricity to more than 5 million customers in Florida. It's a typical utility business with regulated revenues and stable cash flows.

NextEra's clean energy business, NextEra Energy Resources, is where the growth potential lies -- it's already the world's largest producer of wind and solar energy. Scaling up its clean-energy portfolio should lower costs and boost earnings for the company, supporting stronger dividend growth in the years to come.

An economic uncertainty ahead sign against a stormy background.

Image source: Getty Images.

In the past, NextEra's dividends grew at a compound annual rate of 9.4% between 2004 and 2019, driven by annualized growth of 8.4% in its adjusted earnings per share (EPS). NextEra's dividends have historically grown pretty much in-line with earnings, which means management's medium-term financial goal of growing adjusted EPS by high-single-digit percentages through 2023 should be followed with similar dividend raises.

The trend, in fact, should continue well beyond 2023, as the renewable energy industry is expected to attract investments worth trillions of dollars in coming decades as the adoption of clean energy gathers steam. NextEra is well poised to exploit any opportunity -- its renewables backlog in the latest quarter crossed 15 gigawatts, which is larger than the company's existing renewable capacity. If you let NextEra's modest dividend yield of 1.9% deter you, you could miss out on solid potential stock price gains backed by dividend growth.

A recession won't hurt this company

Waste Connections' (WCN 0.41%) business makes it one the best recession-proof stocks you could find. It's simple: Whether boom or recession, we don't stop generating trash, keeping a trash-management company like Waste Connections almost always busy. As evidence, despite the COVID-19 pandemic disrupting business because of lockdown, Waste Connections projected 2020 revenue to be $5.33 billion last quarter, down barely 1% from 2019. It expects to generate operating cash flow worth $1.6 billion at the midpoint this year.

Thanks to the resiliency of its revenue and cash flow, Waste Connections has consistently returned a good chunk of its cash flow to shareholders in the form of dividends. Last October, it increased its dividend by a good 15.9%, marking its ninth consecutive year of dividend increases. "The Board intends to review the quarterly dividend each October, with a long-term objective of increasing the amount of the dividend," said the press release. By the time this article is published, I believe Waste Connections should've already announced its tenth annual dividend increase.

Management's goal to not just pay but increase its dividend in the long run should ring in bountiful returns for shareholders like in the past. Not many know about Waste Connections' incredible stock performance: With reinvested dividends, the stock has gained a whopping 522% in the past decade, hugely outperforming industry leader Waste Management. While past performance doesn't guarantee future returns, the durability and resiliency of Waste Connections' dividends, even during tough times, is indisputable.

A high yield you'll love

An infrastructure company is far from being recession-resistant, but Brookfield Infrastructure (BIP -2.23%) (BIPC -1.91%) is a fine exception, thanks to its line of business and portfolio mix. And it's one heck of a dividend stock, as well.

Brookfield owns and operates assets in utilities, transport, data, and energy. Since cash flows from most of these assets are regulated or contracted under long-term fixed-rate agreements, an economic downturn may not hit Brookfield that hard. Moreover, its stable, predictable, and steadily rising cash flow has comfortably supported strong dividends over the years. Between 2009 and 2020, Brookfield's dividends grew at a compound annual rate of 11%. That's resulted in hefty returns for shareholders. 

BIP Chart

BIP data by YCharts.

Brookfield has a long-term goal of 5%-9% annual dividend increases, backed by regular asset rotation. Brookfield typically acquires value assets, operates them profitably, and sells mature assets periodically to reinvest the proceeds. The company is presently eyeing high-growth areas like 5G technology -- it recently acquired 135,000 telecom towers from India's largest conglomerate for roughly $600 million to enter the huge addressable telecom market.

With an eye on growth areas and a proven business model, Brookfield Infrastructure is the perfect stock for investors seeking wealth-compounding dividend growth in good times and reliable dividends during a recession. The stock currently yields 4.3%.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Infrastructure, Brookfield Infrastructure Partners, NextEra Energy, and Waste Management. The Motley Fool has a disclosure policy.

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