Sectors and Stocks to Invest in to Weather a US Recession
Companies / Dividends Dec 11, 2007 - 10:24 AM GMT
Nilus Mattive writes: Tony's off today, so he asked me to fill in for him. Since he's such an advocate of foreign investing, and I'm the advocate of dividend-paying stocks, I'm taking this opportunity to tell you about a stock that combines both: It's riding the wave of rapid foreign growth. Plus, it pays nice dividends.
We don't often name specific investments here in Money and Markets , but I figured I'd do something a little bit different today. Think of it as an early holiday gift.
The timing couldn't be better:
The U.S. dollar is falling and could fall even more in the wake of more Fed rate cuts.
And the U.S. economy is slumping ... with the likelihood of slumping even further next year.
So diversifying away from the U.S. dollar and the U.S. economy makes a lot of sense — both to me and to Tony.
I'm not going to keep you waiting for the name. It's Unilever N.V., the giant European consumer staples company, which offers a nice trifecta of protection against a U.S. recession:
- It's based overseas.
- It pays steady dividends, and ...
- Its business is recession-resistant, selling products that people buy no matter what the economy's doing.
I'll tell you more about the advantages of Unilever (and other stocks like it) in a moment. First, I want to make it absolutely clear that ...
The U.S. Economic Warning Lights Are Going Off Left and Right!
The Federal Reserve is meeting in just a few hours, and another interest rate cut is practically a lock.
Why? Because the Fed knows that the engine block of the U.S. economy is cracking apart!
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| Another Fed rate cut later today is almost a given! |
Just some of the signs:
The housing market is going through its worst slump in recorded history. Prices are flat out declining ... inventories are at multi-decade highs ... and foreclosures have DOUBLED from a year ago.
According to the U.S. Conference of Mayors, 361 of the largest U.S. cities will experience a combined loss of $166 BILLION in economic growth next year.
Crude oil is still hovering around $90 a barrel, while prices at the pump are still in the $3-a-gallon range.
Consumer confidence is near a two-year low, according to the RBC Cash Index.
So you can see why economists are ratcheting up their predictions of a recession, traditionally defined as two consecutive quarters of economic contraction:
- On November 26, David Rosenberg, North America economist for Merrill Lynch, told clients, "We are going to see an economic recession in '08."
- A day later, Goldman Sachs upped its odds of a 2008 recession from 30% to a range of 40% to 45%.
- Martin Feldstein, professor of Economics at Harvard University, just told Congress the probability of a recession in 2008 has now reached 50%.
- And yesterday, Richard Berner, Morgan Stanley's chief U.S. economist, said the U.S. will slip into a "mild" recession next year.
Just based on historical measures, the U.S. economy is overdue for a period of contraction. Since 1945, there have been 11 recessions, and on average, they've come every five and a half years. Right now, we're already past the six-year mark of continuous expansion. So based on the averages alone, we're overdue for some pain.
Suppose I'm wrong? Then even in the very best case scenario, you'd still be looking at mediocre growth.
So that begs the question:
What Investments Outperform During Times of Economic Weakness?
My Answer: Select Dividend-Paying Stocks
As I first told you back in June , dividend-paying stocks are a reliable way to weather all types of market hurdles. I don't care if you're talking about a falling dollar, a falling stock market, or a U.S. recession ... dividend payers can conquer them all.
Reason: In times of trouble, investors flock to safe havens — the kind of investments that will provide them with steady returns through thick and thin.
What's more, many of the very same companies that pay dividends also provide products that people buy even when times are tough. Examples? Pharmaceuticals, electricity, and food.
According to data from Standard & Poor's, these are precisely the groups that have outperformed in past recessions:
Overall, the S&P 500 has lost an average of 21% during past recessions. In contrast,
The average utility lost 15% and beat the market in 9 out of ten past recessions ...
The average health care stock posted a 7.3% decline and outperformed the market in 80% of the recessions, and ...
The average consumer staples stock lost just 2.4%, beating the market 90% of the time.
Sure, each of these still posted losses. But these were just the averages of very big and broad industry categories. If you dig a bit deeper within these groups, you'll find three industry subsectors that have not only beaten the market during downturns, but actually posted gains during the decline!
Specifically ...
Alcoholic beverage makers not only beat the market in 80% of the recessions, they actually rose an average of 6% ...
Household products manufacturers posted a gain of 1.8% and outperformed in every single instance, and ...
Tobacco companies trumped them all. They rose 9.6% and beat the market in an astonishing 100% of the recessions!
This is precisely why I've told my Dividend Superstars subscribers to buy shares in these kinds of businesses. They're currently holding a tobacco company, two pharmaceutical firms, a utility, and two household products companies. If that's not a super team of recession-fighting stocks, I don't know what is.
Let me tell you more about one of them right now ...
Unilever Riding Higher in the Face of Economic Slump, a Falling Dollar, and More
Unilever N.V. is a highly diversified consumer staples company.
Its massive food division (53% of sales in 2006) boasts brands like Ben & Jerry's ice cream, Hellman's, Breyers, and Lipton.
It's equally massive household products division (47% of sales) makes and sells familiar names like Vaseline, Dove, Suave, and Snuggle.
The very fact that Unilever focuses on necessities with strong brand names helps explain the stock's strong outperformance lately. As you can see in the chart, it has risen steadily throughout the market's recent turmoil.
And there are plenty more reasons why I like it as an anti-U.S.-recession play:
- It is geographically diversified, with almost equal amounts of sales coming from Europe, the Americas, and Asia;
- It has a proven history of thriving even when commodity costs are rising or economies are weakening; and
- It has been paying out a large part of its profits to shareholders through steadily increasing dividend checks.
Unilever is based overseas, but you can buy its shares on the New York Stock Exchange as American Depositary Receipts (ADRs). Each ADR share represents one share of the foreign stock, and you will receive the company's generous dividends in dollars.
Plus, with ADRs, you also stand to benefit from any further weakness in the greenback.
One word of warning: Unilever has had a very strong run. So rather than rushing out and loading up today, you may want to wait for dips.
Sincerely,
Nilus
P.S. If you'd like to get my other recession-fighting picks, subscribe to my monthly Dividend Superstars for just $39 per year (half off the regular price), and you can immediately download ALL of my early holiday gifts:
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