Would you like to learn how to select the best dividend stocks that will continue to appreciate irrespective of the economy?
Some stocks are prone to capitulation when the financial market begins to go through one of those “ugly phases” that often lead to a recession. If you are looking to invest in the stock market and remain profitable over time, then it is wise to go for the recession-proof dividend stocks.
You may be asking if it is possible for a stock to be free of the adverse economic tendencies that come with a recession. Yet, it is possible and, in this article, we give you a guide on how to choose this type of stock.
Why are Stocks Exposed to Recession?
The global financial system is prone to a recession. It usually happens after a couple of years and in some cases, after some bad economic decisions are taken and implemented.
When this happens, different financial assets, ranging from stocks to cryptocurrencies tend to decline in value.
One other reason for the recessive nature of some stocks is because of the industry they are offered. For example, there is a term as “cyclical stocks,” which refers to the stocks of companies that are overly exposed to adverse economic policies, due to the industries they feature.
Why the Dividend Stock is a Hedge Against Recession
One of the practical ways to invest in the stock market, despite the recession, is to go for the dividend stocks. Also called stock dividends or dividends for short, these are the stocks that make regular profit distribution to the holders.
Unlike the traditional stocks that grow or increase in value as the market share grows, the dividend stock tends to return profits only at a certain time. Say, the company owning the stock makes more profits during the quarter. In that case, the company tends to make more payouts than it has made earlier.
Thus, if you are looking to hedge against recession, still have your money in the stock market and not looking to sell your stock anytime soon – going for the best dividend stock is the best bet.
How to Choose the Best Dividend Stock
Now that we have ascertained the relevance of the dividend stock, in terms of helping you remain profitable during a recession; we would also like to talk about how to choose one.
Here are some of the criteria for picking a highly-rewarding dividend stock in a recession:
1. Decide on the Type of Stock to Invest in
For emphasis, there are two (2) major ways to determine whether a stock is recession-proof or not. The first is whether the stock is cyclical and the second is whether the stock is non-cyclical.
By cyclical, we mean those stocks that are exposed to the present economic realities. In this instance, the company issuing the stock is a major player in the industries that tend to capitulate when the recession hits hard.
On the other hand, you may prefer going for the non-cyclical stocks, which are the opposite of the cyclical stocks. For this type of stocks, the present economic realities, i.e., recession, doesn’t overly usurp the growth or performance.
Generally, it has been ascertained that the non-cyclical stocks tend to hold up higher than the cyclical stocks, because the companies issuing the stocks make more money and have more dividends to share – even during a recession.
2. Understand the Industry the Company Plays in
One of the major ways to win in the war against recession is to have your money invested in stocks that pay dividends. And one of the ways to do that is to understand the type of industry the company issuing the stocks plays in.
As earlier mentioned, the industry or market where the dividend-paying company features has a role to play in the value of the stock during a recession.
For this purpose, we have handpicked some of the best industries where you can be sure to find recession-proof dividend stocks. These include:
Healthcare
Think about it – when there is a global financial crisis, such as a recession, people do not only get cash-strapped, but also deal with inflation and ill health.
Except the ill person doesn’t want to get better, there is a higher chance that seeking urgent medical attention will be required. This paves a way for you to seek investment opportunities in the companies involved in healthcare.
From the companies that distribute drugs to the pharmaceutical companies, you want to buy their dividend stocks because they will always be in business.
Examples of healthcare dividend stocks that have continued to hold up in recent recessions are:
- Pfizer (NYSE:PFE)
- Johson & Johnson (NYSE:JNJ)
- UnitedHealth Group (NYSE:UNH)
Buy Dividend Stocks of Utility Companies
When you want to chose a dividend stock, go for one that involves utility. At the mention of the word, “utility” people think it is limited to telephone bills and access to the Internet.
Utility, in a general sense, refers to the overall expenses we make for our daily needs. From telecommunications to access to the Internet, electricity and water, all these are examples of utilities.
Likewise, it is a better bet to buy the dividend stocks of the companies that offer any of those services.
For example, NextEra Energy (NYSE:NEE) is in the business of transmitting electricity, providing renewable energy solutions and the transportation of natural gas.
You may also want to invest in the dividend stock of Waste Management (NYSE:WM) engaged in the provision of waste collection and recycling services or that of American Water Works (NYSE:AWK) offering water and wastewater utility services.
You can also buy the dividend stocks of companies offering the following utility-related services:
- Telecommunications
- Data centers
- Gas pipelines
- Cell towers and;
- Power lines
Consumer Goods
Despite the declining economic fortunes of the country and that of the companies and individuals, people must still buy things they need to keep themselves alive, in this case, food items.
So, why don’t you buy the dividend stocks of companies in the consumer goods or consumer staples industry?
These companies manufacture and distribute essential products, ranging from groceries, and household/personal products.
Conclusion
There are many other examples of dividend stocks, such as companies offering discount retails of goods, dollar stores, auto parts stores and home improvements.
The few stocks we mentioned in this article are just examples. You are advised to make further research and consult a financial expert for guidance before you buy any stock.
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