2 Opportunistic Stocks to Buy the Dip
Written by Puja Tayal at The Motley Fool Canada
The World Bank has again warned of a global recession in 2023 if supply chain disruption and labor shortages don’t abate. Investment veterans believe the 2023 recession won’t be as big as the dot.com bubble or the 2009 crisis. But every recession brings new scenarios.
The energy supply chain is interrupted because of the Russia-Ukraine war. If the war continues, the supply disruption could spread to semiconductors and other sectors. In this scenario, supply chain disruption could keep prices high even as interest rate hikes slow demand.
How to invest in a recession
Even if the recession is not yet visible in numbers, many households are feeling the pressure. It’s time to prepare for the recession before it hits. First, avoid panic selling when the companies in your portfolio are profitable, have little debt, and have long-term demand. Second, use the dollar cost average method to invest in stocks.
The stock market could see a sharp decline during the recession. It’s hard to say when the market will bottom out. As such, a good strategy is to identify the stocks you want to invest in and invest a small amount regularly (say, $100 per month per share). If the stock continues to fall, your average cost will also fall. When these stocks rally during an economic recovery, the lower dollar cost average costs can boost your returns.
Now for the next question: Which stocks should you invest in during a recession?
Defensive Dividend Stocks
The stock market will fall, but defensive stocks could recover. Defensive stocks are companies whose products or services you buy despite a recession, like power, utilities, groceries, and healthcare. These sectors aren’t significantly affected by economic cycles, but when their stocks fall, they bounce back. The idea behind defensive investing is to control the risk of losing money.
Outside of defensive stocks, Dividend Aristocrats are good investments because they can lock in higher dividend yields in a market downturn. In the Canadian stock market, utility stocks are good dividend stocks.
Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) provides regulated power, water and natural gas utility services to over one million customers. Electricity demand will continue to increase with the electric vehicle (EV) boom and the spread of the Internet of Things (IoT). This utility is well positioned to grow by increasing its capacity. There are several power generation projects under construction that will add new revenue streams for Algonquin.
Algonquin uses the money from utility bills to pay dividends. It has increased its dividend by a CAGR of 12% over the past 10 years. The utility could continue to grow dividends even in a recession, likely at a slower pace as construction of new projects could slow.
No stock is completely immune to a recession. Algonquin’s stock is down 14% and is trading closer to its March 2020 plunge. But that drop has created an opportunity to lock in a dividend yield of 5.36%. Power is not going out of business and Algonquin’s fundamentals remain strong. Dollar-Cost-Average could help you cut costs and boost your growth if the stock recovers.
Diversify into different asset classes during a recession
Real estate is always a good investment in a dip. It’s not as if REITs are unaffected by a recession. But this asset class has a higher probability of recovering with the economy. In addition, a REIT is required to return a significant portion of its rental income to shareholders because they enjoy trust tax status. At worst, a REIT could cut its payouts RioCan made during the pandemic. But if a REIT cuts its payouts, its stock price would fall, and dollar cost averaging will lower your costs.
For the 2023 recession Choice Properties REIT (TSX:CHP.UN) is a solid investment as it generates 57.5% rental income Loblaw (a defensive stock). The selection can give you asset class diversification and the resilience of a defensive stock. The share price is down 14% since April and could fall further during a recession. You can secure a higher distribution yield during the downturn and set yourself up for long-term passive income.
The post How to Invest in a Recession: 2 Opportunistic Stocks to Buy the Dip first appeared on The Motley Fool Canada.
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Stupid contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.