Successful investing is a bit like connecting the dots. Put enough of them together and they begin to form a picture.
Unfortunately, today's dots are pointing towards a recession.
With first-quarter GDP growth under 2% and a whole host of indicators moving in the wrong direction, it looks as though the U.S. economy has stalled.
That leaves income investors like us faced with a very important question: how do we best protect our portfolios from the stock price declines and dividend cuts that a recession would bring?
One simple answer is to invest in those countries that are not suffering recession. That opens up a world of possibilities.
For instance, you might consider investing in Japan, which grew at over 4% in the first quarter. Orix Corporation (NYSE: IX) is a name I like.
Or better yet you could invest in emerging markets where growth continues to sizzle.
That makes stocks like the Aberdeen Chile Fund (NYSE: CH) a good buy-especially considering the fund offers a dividend yield over 10%. The fund is attractive to me for two reasons.
First, it's because Chile is a well-run country, standing higher than the U.S. on several international business surveys. But more importantly, its dependence on copper and other commodities is not a problem unless the global economy as a whole goes into recession, which I don't expect.
With assets in primarily Chilean securities, the fund also offers investors a nice measure of diversification from the U.S. economy, since they can expect Chile to keep on growing-- even if the U.S. economy takes a step backwards.
But that doesn't mean you need to avoid the U.S. altogether, either.
In fact, there is a key indicator I'll discuss in a moment which will allow you to preserve your income and the value of your investments through all but the deepest recessions.
First though, you'll need to avoid a few pitfalls. As always, it's never just a matter of picking the stocks with the highest dividend yield. It's just not that simple.
In fact, a number of the highest dividend-paying companies like American Capital Agency (Nasdaq: AGNC) have dividends that depend on financial game-playing--- borrowing in the short-term markets and investing in long-term housing agency debt.
While the income stream from the agency bonds will remain solid in a recession (because it is effectively government guaranteed) entrusting much of one's wealth to this kind of scheme is foolish.
Meanwhile, other high-paying dividend companies have overleveraged balance sheets.
B&G Foods (NYSE: BGS), for example, has an excellent recession-proof business in managing brands of shelf-stable foods such as Cream of Wheat and Grandma's Molasses - products whose sales generally suffer little in a recession. At its current elevated share price of around $26 it still has a dividend yield of around 4%.
However, its balance sheet has a 4:1 debt/equity ratio, and excluding intangible assets it has a negative net worth.
BGS also suffered badly in 2008-09, with the share price dropping below $3. This could easily happen again if bank facilities became tight.
The True Sign of Recession-Proof Stocks
However, at the other end of the spectrum, there are some dividend aristocrats which have not only maintained but increased their dividends for over half a century.
Having survived every recession since 1962, they can be expected to survive the next one, and indeed to continue increasing their dividend.
For investors, that's the true sign of a recession-proof stock.
As a result, these types of stocks represent the ultimate safe haven for your money. Their share price and even earnings may decline, but their dividends should continue to increase.
There are 10 such companies, four of which have a current dividend yield of 3.5% or more - giving you a pretty good yield at a time when even 30-year Treasury bonds yield only 2.7%.
They include:
- Procter and Gamble Co. (NYSE: PG) has increased dividends every year since 1954. This huge household goods company pays a dividend yield of 3.7%;
- Northwest Natural Gas (NYSE: NWN) has increased dividends every year since 1956. With a dividend yield of 3.7%, the company stores and distributes natural gas in Oregon, Washington and California;
- Emerson Electric (NYSE: EMR) has increased dividends every year since 1957. This worldwide engineering services and solutions company pays a dividend yield of 3.5%;
- Cincinnati Financial Corp. (Nasdaq: CINF) has increased dividends every year since 1961. The property and casualty insurance company pays a dividend yield of 4.2%.
Here's the best part: with those four you even get the diversification of four different sectors along with the ultimate dividend-producing, sleep-at-night investments.
So you see sometimes, investing can be easy---even in the face of a recession.
Good Investing,
Martin Hutchinson, Editor
Permanent Wealth Investor
Further Reading...
In an earlier article Martin explained how emerging market dividend stocks give investors the best of both worlds. He even showed readers two ways to create an emerging market income stream. To learn more about Permanent Wealth Investor click here.
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