The specter of a “recession” has haunted economic and financial discourse for over a year now. While the certainty of an impending recession remains elusive, one undeniable truth is the importance of having a strategy to weather economic downturns. Recessions can wreak havoc on portfolios due to share-price declines and the potential missteps made by unprepared and panicked investors.

Today, we turn our weekend conversation to one of the simplest protective measures you can adopt to bolster your portfolio’s stability: investing in dividend stocks.

The Background

If you’ve been following the financial news, you’re likely aware that experts have been sounding the recession alarm for a while. Several prominent voices, including those at Wells Fargo (NYSE:WFC), Interactive Brokers (NASDAQ:IBKR), SoFi (NASDAQ:SOFI), and Comerica (NYSE:CMA), have expressed their expectations for a recession at some point in 2023.

Yet, as we progress through nearly three-quarters of the year, a recession has not materialized. Officially, the National Bureau of Economic Research (NBER) Business Cycle Dating Committee determines whether the U.S. is in a recession or not, considering various criteria. One key recession signal is two consecutive quarters of GDP contraction, which hasn’t occurred:

• First-quarter GDP: +2.0%
• Second-quarter GDP: +2.1%

While some experts suggest a possible “soft landing” (no recession despite the rapid rate hikes by the Fed), others remain convinced that a recession could arrive fashionably late. Different opinions abound:

• A Bloomberg consensus of economists gives a 60% chance of a recession.
• Goldman Sachs lowered its odds of a recession in the next 12 months to 15%.
• Western Asset predicts a soft landing.
• The Conference Board anticipates a short and shallow recession by Q4 2023 or Q1 2024.

In summary, there’s no consensus on the horizon.

However, a recession is a serious matter, especially for those investing their hard-earned savings. Therefore, it’s wise to have an investment strategy in place in case a recession looms. Alternatively, you can set up your portfolio to thrive regardless of economic conditions, be it a recession or a soft landing.

The Solution

This week, we had the opportunity to speak with Austin Graff, CFA, Co-CIO, and Portfolio Manager of the TrueShares Low Volatility Equity Income ETF (DIVZ). His suggestion for navigating a recession is straightforward and typical: invest in dividend stocks.

Dividend Stocks 101

Dividend stocks offer an additional way to earn returns alongside potential share price appreciation. These stocks belong to companies that regularly distribute cash payments to shareholders. While some firms pay one-time dividends due to unique circumstances, many consistently pay dividends, often quarterly, from their profits.

Why Dividends Shine During Recessions

1. Cash Payments: Dividend stocks provide a source of return through their cash dividend payments, which can enhance portfolio stability during market downturns.
2. Investor Attraction: Dividend-paying stocks tend to be more appealing to investors during challenging economic times. Increased demand for these stocks can bolster their share prices.
3. Quality Indicator: Companies that can maintain dividend payments even during recessions often have higher-quality businesses. They generate free cash flow throughout economic cycles and demonstrate financial resilience.

Where to Find Resilient Dividends

Graff suggests considering sectors that can experience abnormal growth over the next few years:

1. Energy: Opportunities in oil and gas are emerging due to supply-demand imbalances, making these stocks attractive.
2. Industrials: Equipment companies benefit from investments in chip manufacturing, new infrastructure, and roads and bridges. However, high valuations can be a challenge.
3. Healthcare: Pharmaceutical companies often perform well during recessions, as people continue to require medications regardless of economic conditions. This sector can provide both income and capital appreciation.

While the mentioned sectors hold potential, Graff also advises exploring dividend stocks in sectors like communication services, where high-yield stocks like Verizon and AT&T offer attractive valuations.

Why Dividends Over Bonds

Dividend stocks offer advantages over bonds, particularly in an environment with rising inflation:

• Inflation Protection: Unlike bonds, dividend stocks can increase their pricing alongside inflation, providing a hedge against its erosive effects on purchasing power.
• Income and Capital Appreciation: Dividend stocks offer income and potential share price growth, providing more dynamic returns than fixed-income investments.

Graff underscores the importance of owning high-quality companies capable of growing earnings throughout economic cycles. Rather than attempting to time the market, focus on dividend stocks to keep your money growing, irrespective of market sentiment swings.

In conclusion, dividend stocks offer a valuable strategy to strengthen your portfolio, whether you anticipate a recession or not. Their combination of income, potential growth, and stability makes them a reliable choice for long-term investors.

Featured Image: Freepik @ jcomp

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