While the stock market has bounced 20% from its bottom late last year, we're not out of the woods yet. Several indicators suggest that a recession could be around the corner. An economic downturn could stir the bears again, sending stocks lower.
Given that uncertainty, investors might want to consider taking a defensive approach. Duke Energy (DUK -1.33%), Brookfield Renewable (BEP 0.19%) (BEPC 0.09%), and NextEra Energy (NEE -1.36%) stand out to a few Fool.com contributors for their ability to weather a potential recession. Here's why they believe these are great stocks to buy for those who want to play defense ahead of another potential bear market plunge.
It's all approved
Reuben Gregg Brewer (Duke Energy): As one of the largest utilities in the United States, Duke Energy won't excite you very much. And that's the point behind adding this stock and its 4.4% dividend yield to your portfolio. In fact, the company intends to get even more boring, with the planned sale of its relatively small contract renewable power operations. After this deal is consummated, virtually all of Duke's business will be regulated.
Regulated utilities are granted monopolies in the areas they serve. In exchange, they agree to government regulation of the rates they charge customers and the investments they make in their operations. Once rates and investments are agreed upon, they are implemented.
It doesn't matter all that much what's happening on Wall Street (things may change at the edges, but the core plans are unlikely to alter much). So when a company like Duke Energy says it believes its longer-term earnings growth rate will be between 5% and 7%, it probably will be, even if there's a bear market waiting in the wings.
While 5% to 7% may not sound like an exciting growth rate, it really isn't meant to be. Regulators are looking to find a sustainable balance between investor returns and customer costs and needs. However, add in the 4%-plus dividend yield, and you come out with a return of around 10%, which is actually fairly compelling.
And don't think that Duke is foregoing clean-energy investment with the sale; it is just switching from building renewable power for others to building it for itself to increase the amount of clean energy it directly produces for customers. That, in turn, should make getting regulator approvals even easier.
A fully powered growth plan
Matt DiLallo (Brookfield Renewable): Brookfield Renewable built its business to generate steady growth regardless of market conditions. The renewable energy giant sells power to utilities and corporate buyers under long-term, fixed-rate power purchase agreements, many of which link rates with inflation. That enables the company to generate steadily rising cash flow. Inflation-linked rate increases alone should grow Brookfield's funds from operation (FFO) per share at a 2% to 3% annual rate.
The company has several other growth drivers. Margin enhancement activities like locking in higher prices as legacy contracts expire, development projects, and acquisitions can add another 5% to 18% to its FFO per share each year. The company has already secured and funded 8% annual growth through 2027. It should be able to deliver FFO per share growth in excess of 10% annually.
The company's continued success in securing new growth opportunities drives that view. For example, Brookfield and its partners recently agreed to acquire Duke Energy's commercial renewable energy business. That deal will boost its FFO by 3% next year while providing additional upside from its development pipeline and actionable margin enhancement opportunities.
Brookfield Renewable's growing FFO will enable it to continue increasing its dividend. The company has grown its payout by at least 5% annually for a dozen years in a row. It's targeting to grow its payout, which currently yields more than 4%, by 5% to 9% per year over the long term.
Brookfield's high-yielding dividend provides a nice base return during periods of market volatility, while its locked-in growth gives it ample upside potential. Those features make it a great stock to buy when the market starts turning bearish.
Compelling returns even in a bear market
Neha Chamaria (NextEra Energy): Utility stocks are known for their resilience for one simple reason: Utilities can generate steady cash flows at almost all times, given the stable demand for necessities like electricity and gas, and can afford to dole out regular dividends even during turbulent times.
Owning shares of NextEra Energy, therefore, could be a smart move in a bear market. NextEra Energy owns the largest electric utility in North America called Florida Power & Light Company, is the world's largest producer of wind and solar energy, and has a well-laid-out plan that could potentially earn you double-digit annualized returns.
By pumping billions of dollars into its utility and renewables businesses, NextEra Energy expects to grow its adjusted earnings per share by a compound annual growth rate (CAGR) of 6% to 8% between 2024 and 2026 and annual dividend per share by nearly 10% through "at least" 2024.
Even if NextEra Energy's dividends grow at a compound annual rate of 8% per year, you could still earn double-digit percentage returns on your shares, given the stock's dividend yield of 2.5%. That's a pretty good deal for a bear market.
To add some more perspective, NextEra Energy's dividend per share has grown at a solid CAGR of 9.9% over the past 15 years. While past performance does not guarantee future returns, NextEra Energy's clout in the traditional utility industry as well as clean energy makes it the right kind of stock to own for bear markets.
