Some investors are looking at the latest economic data and worrying that the recession will worsen in 2021, spelling potential disaster for their stock portfolio. This concern is especially true among retirees who can't afford steep declines in their accounts this late in the game.
As an investor, you definitely shouldn't let fear cause you to overreact, but it might be wise to consider a more conservative allocation if your portfolio includes too much exposure to equities or growth stocks with high valuations.
If you're wondering what to invest in during a recession, it's smart to consider two primary features in the companies you look at: defensive businesses and high dividends.
Defensive stocks have products and services with stable demand throughout recessions, such as utilities, household goods, basic apparel, groceries, or healthcare. When unemployment spikes and people worry about job security, household budgets get slashed. Luxury items and discretionary expenses are usually the first to go. But consumer staples tend to still sell well. Dividends are an important source of returns when the stock market drops during recessions. Dividends provide income to shareholders, even if the stock value is down, and this can help you avoid selling at temporary lows and sabotaging your performance.
The following three stocks embody these important characteristics and will help most investors successfully navigate a recession.
1. IDACORP: A stable, niche utility
IDACORP (NYSE:IDA) operates Idaho Power, an electric utility company with over 580,000 customers, along with smaller subsidiaries that contribute minimally to its financial results. Like most utilities, Idaho Power's sales are generally steady, with an average 2.2% annual growth rate over the past three years. Electric utility performance tends to vary more with the weather than economic conditions, so these are generally favorable stocks to own through a recession. The company has noted no major impact from COVID-19 on its operations. Further, from October 2007 through March 2009 in the market crash that came during the Great Recession, IDACORP's share price only fell about 23%, compared to the S&P 500's near-51% plunge during the same timeframe.
IDACORP shareholders currently enjoy a healthy 3% forward dividend yield, and the company has increased its dividend every year for the past decade. While the dividend has grown more quickly than revenue, the company has maintained sustainable dividend payout ratios with rising earnings per share. IDACORP's current 55% payout ratio should be more than stable, so investors shouldn't be worried about that income falling in the near future. This company is relatively recession-proof, holders can take income each quarter, and the stock is less likely to drop drastically in a recession.
2. PepsiCo: A global beverage and snack giant
PepsiCo (NASDAQ:PEP) owns several well-known soft drink brands, but it also derives significant revenue from other major food and beverages brands, including Frito-Lay, Quaker, Tropicana, Gatorade, and Rockstar. The company's diversification across numerous prominent brands and into countries all over the world means that financial results are relatively predictable and reliable, even through recessions. Sales have risen through the coronavirus crisis, though earnings have fallen slightly. Both revenue and earnings have grown at a low-single-digit-percentage clip over the past three years, and this is the sort of performance that investors should expect moving forward.
PepsiCo held up relatively well in the 2008-09 Great Recession, outperforming the S&P 500 by 18 percentage points, though the stock was not spared in the steep March 2020 coronavirus-related market drawdown. All told, it's fair to expect PepsiCo's stock to perform relatively well through a recession and market downturn. Shareholders are paid a 2.8% dividend yield, well above the S&P 500 average that currently sits near 1.6%. That's great news for investors who are worried about their portfolio's prospects in a recession.
3. CVS Health: A major drugstore with additional opportunities
CVS Health (NYSE:CVS) operates a well-known chain of approximately 10,000 drug stores across the U.S. It also owns and operates national insurer Aetna. Many investors may not realize that approximately 25% of the company's sales are generated by its pharmacy benefits manager services, in which CVS administers the prescription drug benefit portion of several health insurance plans. This subsidiary was established when CVS merged with Caremark in 2007. Drug store sales and prescription medicine volumes are influenced by economic cycles, but this is still a relatively defensive business. The pandemic-driven nature of the current recession has actually been a financial boon for CVS Health, which is enjoying a temporary surge in revenue and higher profits. Investors should expect the drugstore chain's fundamentals to remain stable in any recessions for the near term.
As with the stocks above, CVS Health notched above-average performance during the Great Recession, and it pays an attractive dividend yield. The stock price only dropped about 30% from 2007 to 2009, far less than the S&P 500, owing to its defensive nature and modest valuation. The 2.6% dividend yield is not going to set the world on fire, but it's a decent income stream in the current low-yield world. If you're worried about a recession causing market turmoil, CVS Health is a great building block.