The threat of recession can send you on the edge of despair, because there’s a possibility that earnings from your stock investments could shrink. You want to have protection and assure yourself of a durable portfolio in times of recession.
The smart investor will not yield to the pressure or allow panic to set in. Instead of fearing the future, your portfolio should have recession-proof stocks that could let you ride out the economic downturn.
Look for companies with growing EPS With the Canadian economy in the cusp of a recession, National Bank of Canada (TSX:NA) should be your logical choice. Whether the downturn comes sooner or later, you have a reliable dividend stock that won’t give you financial headaches.
The return on shareholder equity of this $20.74 billion Montreal-based bank is 18.7% — an above-average level. Another compelling reason to invest in this bank stock is its growing earnings per share (EPS). You can count the number of publicly listed companies today with growing EPS.
Over the past three years, National Bank was able to grow its EPS by 22%. If the company can sustain that growth, your earnings from the stock’s 4.5% dividend would not diminish your portfolio’s return.
Find out the total returns — not just the dividend yield Another way to bulletproof your portfolio is to look at the total return and not only the dividend yield. With this step, TC Energy (TSX:TRP)(NYSE:TRP) is the stock that could make you a winner regardless of market environment.
TRP’s historical performance is nothing short of superb. The total return of a $10,000 invested in the stock a decade ago would be 359.4% today. That is excluding the reinvestment of dividends. But if you play your cards right and reinvest the dividends, the total return would be 638.24%.
Don’t buy the argument that you can maintain a healthy portfolio by investing in high-paying dividend stocks only. TC Energy rewards investors with capital gains and dividends. Ten years ago, the price of TRP was $14.45. Currently, the stock is trading at $67.93, or a capital gain of 370%.
Given TC Energy’s rich development pipeline, you can expect the dividend to grow at a CAGR of 8-10% through 2021. The stock currently yields 4.5%.
Invest in standout performers Since your primary concern is to prepare for the impending recession, National Bank of Canada and TC Energy are both standout performers year to date. TRP is up 42.7%, while NA is ahead by 15.77%, despite the prevailing low-interest environment.
Panic-stricken investors tend to look at their portfolios every day. However, this stock combination won’t necessitate daily monitoring of your portfolio.
Don’t fear a bear market During periods of recession or heightened market volatility, investors often change their behaviours. The tendency is to deviate from their financial plans and make irrational decisions. In this instance, the result could be more costly than profitable.
Existing shareholders of National Bank of Canada and TC Energy won’t find the need to unload their holdings and look for better, alternative investments.
If you follow the time-tested steps mentioned above, it is in your best interest to have both stocks in your portfolio today.
Fool contributor Christopher Liew has no position in any of the stocks mentioned.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019