The first half of December 2018 has been the most volatile of market times in 2018. The S&P 500 went negative for the first time this year dropping almost 200 points in one week and down 10% from its all time highs. For longer term investors, this means nothing to them. They have the time period to weather out any terrible storms. Possibly even sit through another financial crisis and buy even more stocks at the bottom. For those who are looking to add a little safety to their portfolio, I have chosen 5 of what I believe are the best recession proof stocks that have done well through bad markets.
These are by all means my opinions. Of course in reality, you’ll want much more than just 5 stocks safeguarding your portfolio. In theory, the more stocks you own, the more diversified your portfolio becomes. Even if the stocks are highly correlated. This diversification effect starts having diminishing returns around the 15-20 stock count.
Best Recession Proof Stocks
McDonald’s Corp (MCD)
Whether in good times or in bad times, people still gonna be eating their hamburgers. Their cheap fast food meals and $2 McCafe coffees are an alternative to dining at expensive restaurants when the economic busts. I backtested MCD against Starbucks (SBUX) and Yum! Brands (YUM) from 2005 to 2011. The period right before the financial crisis and the years afterwards. SBUX and YUM are generally considered two alternatives to McDonalds for fast food and pretty dominant in the industry. Here’s how they did:
As you can see from the chart above, McDonalds beats Starbucks and Yum! Brands by far. MCDs had a compounded average growth rate (CAGR) of 21.02% per year with the lowest volatility. Their worst year was only 4.01% compared to SBUX’s 53.79%. Although SBUX had the strong single best year statistic with 143.76% in one year, at the expense of higher risk. If you invested $10,000 into MCD before the recession, you would end up with $38,015 at the end of 2012, a total return of 208.15%! This includes dividend reinvestment since MCD pays a dividend. You can see how this is one of the best recession proof stocks and has increased its dividend 42 years in a row!
Coca-Cola Co (KO)
Using the same logic as above, I’m picking stocks that won’t see a heavy decline in customers during recessions. Coke is one of them. People will continue to drink these cheap cans of soda regardless of an economic boom or bust. The chart below compares KO against its eternal rival, Pepsi Co (PEP). Another great dividend reinvestment vehicle makes this one of the best recession proof stocks.
Although there was a decline in value during the recession, if we judge it from its beginning point on the chart, the stocks of both companies actually ended up sideways. This is the sort of thing we’re looking for during bad market times. Since stocks don’t normally go up during recessions, the next best thing would be sideways. As long as they continue to move sideways, we can still reap in the dividends they pay.
KO had a CAGR of 10.83% during this time period with a slightly higher volatility rating. Their best year far exceeded PEP’s with 30.44%. Their worst year was slightly better than PEP at 24.11%. If you invested $10,000 with KO at the beginning, you’d end up with $20,538 by the end of 2011. A total return of 105.38%! KO is another one of the best recession proof stocks and has increased its dividend payouts in each of the last 55 years!
Colgate-Palmolive Co (CL)
If you don’t know what Colgate is, they sell mainly household and personal care products, such as toothpaste. Another great defensive stock that has been around over 100 years. Their competitors are other household brand items such as Proctor & Gamble (PG) and Clorox (CLX). Here’s the comparison of the three:
From the chart above, all three took a minor dip during the financial crisis but ended up sideways. CL ended up on top with a CAGR of 11.37%, more than twice the other two. Their best year was 22.92% and their worst year was a conservative 10.09%. If you invested $10,000 with them, you’d end up with $21,249 at the end of 2011. A total return of 112.49%. Another great stock that has increased its dividend payments in the last 56 years. This makes this one of the best recession proof stocks. Although it wouldn’t be terrible if you invested in all three of these companies either. They’re all very solid companies.
Duke Energy Corp (DUK)
Who can’t live without electricity these days? In the midst of the recession, you’ll still be turning on your lights at home. That’s what makes DUK a great defensive stock to own during the financial crisis. Its competitors are Southern Co (SO) and American Electric Power (AEP). Here’s the comparison chart:
As you can see, all three energy companies took a dip during the recession but only DUK managed to stay above sea level. DUK ended up on top at the end with a CAGR of 11.73%. Their best year was 30.25% and their worst year was 21.65%. Compared to SO, DUK has higher volatility and a worser worst year. If you invested $10,000 into DUK, you would’ve ended up with $21,741 by the end of 2011. A total return of 117.41%. Another great stock that has paid out a dividend for 92 years in a row. DUK gets added to the list of best recession proof stocks.
Costco Wholesale Corp (COST)
My whole family and everyone I know shops at Costco. You can do you grocery shopping in bulk for cheap. Especially right before a major storm or catastrophic event. People gotta get their groceries somewhere and the annual savings far outweigh the annual membership fee. Its major competitors in the grocery division would be Walmart (WMT) and Target (TGT).
Looking at the chart above, COST has an amazing CAGR of 20.14% and completely crushed the recessionary period staying positive during that time. It sits in the middle between the WMT and TGT for the best year and worst year. Buf you had invested $10,000 into COST, you’d end up with $18,611 at the end of 2011, beating out the other two competitors. COST has a fairly new dividend history with only annual increases over the last 14 years. It has a low dividend yield of 1.00%, lower than the industry average. Yet it has been able to maintain strong returns during bad financial times. The truth is, COST is here to stay as one of the best recession proof stocks.
In Summary, The 5 Best Recession Proof Stocks
- Ticker Symbol: MCD
- Price: $183.48
- Dividend Yield: 2.53%
- Dividend Increases: 42 Years
- Sector: Consumer Discretionary
- Ticker Symbol: KO
- Price: $48.96
- Dividend Yield: 3.19%
- Dividend Increases: 55 Years
- Sector: Consumer Staples
- Ticker Symbol: CL
- Price: $65.40
- Dividend Yield: 2.57%
- Dividend Increases: 56 Years
- Sector: Consumer Staples
Duke Energy Corp
- Ticker Symbol: DUK
- Price: $89.60
- Dividend Yield: 4.14%
- Dividend Increases: 92 Years
- Sector: Utilities
Costco Wholesale Corp
- Ticker Symbol: COST
- Price: $229.10
- Dividend Yield: 1.00%
- Dividend Increases: 14 Years
- Sector: Consumer Staples
Also note that the majority of these stocks are consumer staples. Basically necessities that people will purchase regardless of the market conditions. Consumer Staples is a great sector to look into for other best recession proof stocks if you’re looking for more ideas.
* The Dividend yield data was gathered from www.dividend.com
Disclaimer: I am long MCD and KO.