With inflation proving to be harder to control than many experts predicted, and consumers starting to clearly pump the brakes on spending, there is a real possibility of a U.S. recession in the near future. To be clear, we could certainly still see the economic "soft landing" that the Federal Reserve has been aiming for, but it's not a guarantee by any means.
Therefore, it can be a smart idea to set your portfolio up with stocks that should do well regardless of what happens with the economy. With that in mind, of the roughly 40 stocks in my own portfolio, these are the two I'd worry about least if a recession were to arrive.
An incredible collection of assets that can win in tough times
If I could own only one stock, it would probably be Berkshire Hathaway (BRK.A 0.43%)(BRK.B 0.76%). For one thing, Berkshire isn't just a single business. It's more like a diversified investment portfolio all in one stock.
NYSE: BRK.B
Key Data Points
Berkshire owns more than 60 subsidiary businesses, including recession-resistant giants like GEICO, Berkshire Hathaway Energy, and BNSF Railroad. It also has a stock portfolio worth more than $350 billion that includes massive stakes in Apple (AAPL 2.52%), Bank of America (BAC 0.87%), American Express (AXP 0.06%), and several others, with most of the portfolio handpicked by legendary value investor Warren Buffett himself.
Perhaps the biggest reason I'm comfortable owning Berkshire even during bad times is its stockpile of nearly $168 billion in cash (as of Dec. 31). Even after the $30 billion Buffett insists on keeping in reserves, this leaves almost $140 billion that is currently earning billions in interest income but that could be put to work if opportunities arise. Berkshire's financial flexibility has allowed the company to make some great investments in bad economies -- including the highly successful Bank of America stake -- so a recession could ultimately be a net positive for long-term Berkshire investors.
A boring business in the best possible way
Realty Income (O 1.42%) is a real estate investment trust, or REIT, that specializes in freestanding properties, mostly occupied by retail and service businesses. And there are a couple of good reasons why it should hold up just fine in a recession:
The company specifically invests in properties occupied by recession-resistant businesses, such as discount retailers, drug stores, and quick service restaurants. It focuses on retailers that sell things people need, and that can potentially benefit when consumers are looking for bargains in tough times.
Realty Income is a net-lease REIT. This means tenants sign long-term leases (10 years or more), with annual rent increased built in. Plus, tenants agree to cover property taxes, insurance, and most maintenance costs. All Realty Income has to do is put a high-quality tenant in place and enjoy years of predictably growing income.
The proof is in the performance. Since going public in 1994, Realty Income has produced 13.9% annualized returns, handily outperforming the S&P 500. The stock also has a 5.6% dividend yield and has increased the monthly payout for 106 consecutive quarters, even during recessions.
These stocks can get volatile
As a final point, it's important to mention that while I think these businesses will be just fine, or do even better, during tough times, that doesn't mean their stock prices are completely immune from volatility. In tough markets, both can certainly have double-digit percentage swings in short periods of time.
Having said that, these are best suited as long-term investments, and are designed to be value-creation machines for decades. Any weakness caused by economic headwinds could be a great buying opportunity, but the bottom line is that these are stocks that should let you sleep soundly at night regardless of what is happening in the economy.
