These Recession Proof Stocks Can Help Reduce Portfolio Volatility

Wouldn’t it be great to find stocks performing well during recessions and good economic times? They would go up during bull and bear markets. However, stocks and the market do not work that way.

Investing in stock involves a tradeoff between risk and reward. Hence, there are not really recession proof stocks. However, some stocks perform better during recessions. They have attributes that make them defensive during these times, meaning they perform better and are not as volatile. The key is to find and invest in them.

Recession-proof stocks can reduce portfolio volatility, making ups and downs more tolerable. The stock market is down 20% or more on average in a bear market, which is a steep drop.

Some stocks do not decline as much because they have a lower beta, a measure of volatility. On the other hand, they usually do not rise as much during a bull market.

Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

Are We in a Recession?

As of September 2022, we are technically in a recession, although it may not feel like one. Recessions are usually defined as two sequential quarters of economic contractions as determined by the National Bureau of Economic Research.

Consequently, the US is in a recession because the Gross Domestic Product (GDP) contracted in the first and second quarters of 2022. For example, in Q1 2022, the GDP contracted at a rate of 1.6%; in Q2 2022, the GPD decreased by 0.6%. However, the Bureau has not officially said the United States is in a recession.

Why? Unemployment is low at sub-4%, and America has experienced 20 months of solid job growth. The metrics are hardly signs of a recession. However, it still pays to look at recession-proof stocks.

Stock Markets are Declining

Whether or not the US and the world are officially in a recession, stock markets behave like the economy for several reasons.

First, inflation affects the stock market. The US Federal Reserve is responding with higher interest rates, impacting stocks. Next, geopolitical concerns affect stocks, too, like the War in Ukraine. Lastly, drought has an enormous impact on food prices.

An intelligent investor will plan ahead and look at recession proof stocks in specific sectors.

Types of Stocks that Do Well

Of the 11 stock sectors, some are more defensive than others. For example, Consumer Defensive equities have historically performed relatively well during recessions. This is because consumers need necessities and food in good times and bad.

Other sectors that tend to perform reasonably well are Healthcare and Utilities. Lastly, discount stores tend to do well during a recession because consumers trade down. Therefore, you can create a diversified portfolio with less volatility by picking stocks in these areas.

Just remember, there are really no recession-proof stocks. Todd Pouliet, IAF of Gateway Financial, says, “There are no fully recession-proof stocks. Some sectors, [like] Consumer Staples, Health Care, and Utilities, have historically done better than the broad market during recessions.

In fact, you could also involve ladies’ cosmetics such as L’Oreal S.A. (LRLCF). [Financial] advisors also point to value stocks and commercial real estate as potentially good investments during downturns.”

He adds, “Just remember when those options fail, we call them Black Swan events, but Black Swan events seem to happen more often than in the past, so there is no real place to hide. The best way to protect yourself is through proper asset allocation and rebalancing when needed.”

4 Recession Proof Stocks

1. Johnson & Johnson (JNJ)

Johnson & Johnson (JNJ), the world’s largest healthcare company, is the first recession-proof stock.

The company has three business segments: Consumer Health, Pharmaceutical, and MedTech. Most consumers know JNJ’s brands. They include Tylenol, Listerine, Aveeno, Sudafed, Benadryl, Neosporin, etc.

But the company is also a market leader in drug therapies and medical devices. Total revenue was $95,588 million in the past 12 months.

Johnson & Johnson stock has a low beta of 0.61, below the market value of 1.0. Hence, the stock does not have severe ups and down. Furthermore, the company has a ‘AAA’ balance sheet with no leverage and high-interest coverage.

These characteristics make it an ideal recession proof stock. In fact, the stock price is down a meager 3.1% year to date.

The firm pays a dividend yield of about 2.8%, allowing investors to wait out a bear market. The dividend is covered by a relatively conservative payout ratio of 43%. Additionally, JNJ is one of the best dividend growth stocks, with 60 years of increases.

The stock has some risk because of opioid and talc lawsuits. But it is trading at a reasonable valuation of 16.2X forward earnings estimates, and consumers need health care in good times and bad.

2. Proctor & Gamble (PG)

Proctor & Gamble (PG) is this list’s second recession-proof stock. The company’s history goes back to 1837. Today, it is one of the world’s largest packaged goods companies.

The firm operates through five segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. Some of their well-known brands are Swiffer, Oil of Olay, Ivory, Pantene, Tide, Head & Shoulders, Pampers, Old Spice, Gillette, Dawn, Mr. Clean, Bounty, etc. Total revenue was $80,187 million in the last twelve months.

Proctor & Gamble has a low beta of 0.36, meaning its stock price movements are not well correlated with the broader market. The stock price will not fall as far during bear markets but will not rise as much during bull markets.

They have an excellent balance sheet with an AA- credit rating helping with its recession-proof attributes.

The company is a famous dividend growth stock with 66 straight years of increases. The forward dividend yield is about 2.7% and is supported by a reasonable payout ratio of ~60%. In addition, consistent earnings and cash flow add to its safety.

Proctor & Gamble is rarely undervalued and is now trading at 23X consensus 2022 earnings. Consumers always need basic necessities, even during a recession.

3. General Mills (GIS)

General Mills (GIS) is another 100+ years old company founded in 1866. They operate globally in five segments: America Retail, Convenience Stores & Foodservice, Europe & Australia, Asia & Latin America, and Pet.

The company’s well-known brands include Blue Buffalo, Betty Crocker, Pillsbury, Cheerios, Cascadian Farm, Fiber One, Progresso, Old El Paso, Muir Glen, Wheaties, Yoplait, etc. Total revenue was $19,171 million in the trailing 12 months.

The company is another low-volatility stock with a beta of 0.34. In fact, in a bear market, General Mills’ stock price is up roughly 20% in 2022 versus a roughly -20.2% return for the S&P 500 Index. The firm’s balance sheet has also improved since the Blue Buffalo acquisition, with interest coverage rising and leverage dropping.

General Mills’ strong performance caused the dividend yield to decline to a healthy 2.7%. The company is not known for its dividend growth but has paid dividends for over 100 years.

The company trades at an acceptable price-to-earnings (P/E) ratio of approximately 19.6X. Moreover, consumers need packaged food items in bad times, making General Mills a good recession proof stock.

4. Consolidated Edison (ED)

Consolidated Edison (ED) is amongst the oldest power companies in America, founded in 1823 in New York City (NYC). The utility provides electricity, gas, and steam in the NYC metro area.

It has 3.8 million electricity customers, 1.2 million natural gas customers, and 1,555 steam customers. Additionally, Consolidated Edison operates 533 miles of transmission lines, 15 transmission substations, 64 distribution substations; 6,215 miles of distribution lines; 4,350 miles of mains, and 377,971 service lines for natural gas distribution. Total revenue was $14,503 million in the past twelve months.

The utility has an extremely low beta of 0.25. Despite recession fears, the stock price is up about 12% in 2022 and 30.4% in the trailing 1-year. Because it provides electricity and natural gas in a high population density area, the stock usually performs well during times of uncertainty.

The run-up in stock price has caused the dividend yield to fall to about 3.3%, a still respectable value. The company’s dividend history goes back to 1885 and has a 48-year streak of increases. However, the growth rate is low at about 2.5% annually.

Because the stock price has increased, the valuation has risen to around 21.4X consensus earnings. However, the excellent yield, low volatility, and performance during market downturns make Consolidated Edison a recession proof stock.

Final Thoughts on Recession Proof Stocks

Technology sector stocks did well during the bull run from 2013 to 2021, especially during the pandemic. But all good things must come to an end, and the bear market of 2022 has punished these stocks.

As a result, investors seeking a diversified portfolio probably need to add some recession-proof stocks in sectors like Consumer Defensive, Healthcare, and Utilities.

However, remember, there are genuinely no recession proof stocks, only ones that tend to perform better during times of economic turmoil. These types of stocks often are established companies that pay dividends.

Disclosure: Long GIS and ED

This post originally appeared on Savoteur.


Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, Entrepreneur, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 1.2% (98 out of over 8,252) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.