One word on every North American’s mind is recession. Stock market bearishness is the gauge of what is inside investors’ minds. The Nasdaq crashed (down 30%), and the S&P 500 Index is heading in that direction (down 20%). However, the TSX Composite Index is holding up well (down 12%) thanks to the heavy weightage of energy stocks that are winners of the looming recession.
How to make your TFSA recession ready?
This is a ripe time to go shopping for discounted stocks. The historical data shows that those who bought in the recession outperformed the market in the long term. The Canada Revenue Agency (CRA) introduced Tax-Free Savings Account (TFSA) in the 2009 recession to encourage Canadians to save more.
An account that is an outcome of a global recession reiterates the need to make your portfolio recession ready. While the economy has not yet gone into recession, it could do so by 2023-24. But you have to prepare now to avoid fire fighting at the last minute. Here are three steps to be recession ready:
- Do not sell profit-making stocks.
- Go shopping for dividend stocks.
- Use dollar-cost averaging on the way down.
If you own strong stocks like Constellation Software, Magna International, and Descartes Systems, keep holding them. These stocks have lost their one year of capital appreciation. But they continue to earn profit and have an adequate cash reserve and lower leverage to withstand a recession. Once demand shock eases, these stocks will surge.
Two dividend stocks to buy in a recession
The market downturn during a recession creates an opportunity to lock in high dividend yields for a lifetime. The trick is to choose businesses whose cash flows won’t get affected in a weak business environment. Here are two such dividend stocks:
BCE stock
Let’s do an exercise. You are creating a budget for recession. What expenses wouldn’t you cut? Expenses you wouldn’t cut include energy, other utilities, broadband, telephone, food, and so on. Now, energy and utilities stocks are trading at their cyclical high, because of the global supply chain disruption. But one stock that is not trading near its high is telecom stock BCE. The stock fell 15% from its April 20 peak, wiping away one-year gains.
This selloff has pulled the stock closer to the oversold category, with a Relative Strength Index (RSI) of 35. There is no change in BCE’s dividend amount, thereby increasing its yield to 5.88%. This is a good time to buy BCE, which is amid the 5G rollout. It has provided 5G coverage to 75% of the Canadian population and is on target to increase the coverage to the remaining population. More coverage means more subscriptions, irrespective of the recession. This means the stock can continue paying dividends in a market downturn and gives capital appreciation in a market rally.
TransAlta Renewables
Similar is the case with TransAlta Renewables. The stock is oversold, down 16% from its April high. But it’s an essential service, as the company generates power from wind, natural gas, hydro, and solar. The power produced is contracted for the long term, which means the more power it generates, the more cash it earns.
This cash flow has helped the company pay regular monthly dividends since 2014. It can continue to pay stable dividends, even in a recession. And if you hold the stock till 2030, you can enjoy a significant rally, as governments accelerate renewable energy generation to halve their CO2 emission.
Foolish takeaway
If you don’t have a significant amount, you can invest $500 to $1,000 in each of these stocks throughout the market downturn. You can reduce the average cost and lock in high dividend yields.
