Where to Find Recession-Proof Stocks in Today's Market

By Paul Rolfes
October 27, 2010

Did you ever buy a bottle of milk that tasted funny when you got it home? If you went back to the store to ask for your money back, the store probably gave you a cheerful refund and you left a happy customer.

Unfortunately, when you're investing in the stock market, you're buying a product "as-is," and can't always return it for a full refund. But if you do your homework, make wise choices, and get a little luck tossed your way, you'll most likely earn a healthy return by the time you're ready to cash out.

Nothing makes an investor feel more devastated than counting up losses instead of gains at the end of the year. The recession that recently stalked investors and pounced on their holdings took down many Americans who considered themselves stock market savvy.

Is there such a thing as a recession-proof stock? Let's look at five safe harbors investors have used over the years when the stock market appears to be most unwelcoming.

Utilities

Since the majority of utilities operate under state rate regulations, America's publicly-traded power companies are often regarded as a sector that won't go belly-up in tough times.

Though state regulations have a big impact on profitability, the highly regulated environment also protects you from wild swings in those stocks. Some of the top names include Exelon (NYSE: EXC) and FirstEnergy (NYSE: FE).

Big Blue-Chips

Investors might have gotten burned by GM, but there are others that have held up through the years, like General Electric (NYSE: GE) and Pfizer (NYSE: PFE). These two stocks carry a Morningstar top-of-the-line five-star rating. Another Dow stock, McDonald's (NYSE: MCD) also remains a favorite among for low-risk, long-term investing.

The Dow Jones Industrials are made up of 30 large companies, but investors can also find cream-of-the-crop stocks among the Standard & Poor's 500 list, which is viewed as more representative of the stock market as a whole.

Dividend-Paying Stocks

While certain companies may have paid a dividend for many years, the recession rewrote the rules, and many firms were forced to cut their payouts. Even mega-conglomerate GE was forced to slice its dividend by two-thirds in 2010 while it struggled to counter the effects of the recession with restructurings and cutbacks. 

That being said, dividend-paying stocks tend to be great places to hide out in recessions. As long as you find companies healthy enough to sustain their payout, you get to collect income even if the stock price bounces around. If getting an annual, quarterly or monthly dividend check sounds good to you, click here to check out our tutorial on income investing, The 5 Rules Every Income Investor Has to Know.

The "Sin" Companies
When times get tough, it seems that shares of the makers of alcoholic beverages still hold up. Same with tobacco company stocks: No matter where you stand on smoking, the companies keep making money despite overall declines in cigarette consumption. Philip Morris parent company, Altria Group (NYSE: MO), as well as Anheuser Busch InBev (NYSE: BUD) and Diageo (NYSE: DEO) come to mind.
#-ad_banner_2-#Household Products

No matter how bad the economy is, you still have to clean your house -- and yourself. What the king of consumer products, Procter & Gamble (NYSE: PG) has found is that in downturns, people cut costs by turning to store brands and other cheaper generic items. So P&G and its competitors, like Colgate-Palmolive (NYSE: CL) and Clorox (NYSE: CLX), constantly focus on and invest in building brands that convey value even when money is tight.

Just as you have to shave, shower, shampoo and clean up, you have to eat. Companies like Campbell Soup (NYSE: CPB) and H.J. Heinz (NYSE: HNZ), and beverage giants PepsiCo (NYSE: PEP) and Coca-Cola Co. (NYSE: KO) also remain popular investing choices during recessions.

If you want to learn more about what to buy when, it's helpful to look back at what performed well during comparable situations in the past. An entire theory called the "Sector Rotation Model" identifies which types of stocks perform well during specific points of market and economic cycles. Click here to learn how to use sector rotation to Find The Best Stocks To Buy Now.

The Investing Answer: Remember, just because a market is in a downturn doesn't mean there aren't places you can weather the storm. Recession-proof stocks may not always rise in a bear market, but there is little doubt they can help your portfolio maintain its value during tough times.