Which Sectors Perform Well During Recessions?

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During periods of economic contractions some sectors perform well while others don’t. For instance, when the economy is in recession, sectors such as leisure, travel, consumer discretionary, luxury retail, etc. are adversely impacted as consumers cut back on spending on those items. On the other hand, consumer staples, energy and utility sectors remain stable during tough times since consumers still buy necessitates like toothpaste, soap, food, etc. Similarly the utility sector also offers stability during recessions since people still need electricity and gas to maintain their daily life.

The chart below shows how different sectors perform during recessions and expansions:

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Source: End-of-Cycle Management, Franklin Templeton

A few of the stocks from the sectors that outperform in recessions are listed below:

  • Kimberly-Clark Corp (KMB)
  • Southern Co. (SO)
  • Unilever PLC (UL)
  • Colgate-Palmolive Co (CL)
  • Henkel AG & Co KGaA (HENKY)

Disclosure: No positions

S&P 500 Price vs. Total Returns Since 1987

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Dividends are an important factor to consider when calculating the total return of an equity investment. Though the dividend yield of a stock may be low in the range of 2 to 4%, over the long run the yield gets multiplied many times over due to the effect of compounding.

Many investors overlook the critical role dividends play especially in providing a cushion to a portfolio in adverse market conditions and amplifying returns when measured in years. For example, the S&P 500’s total return,  which includes dividends, over the past two decades is more than double of the price return as shown in the chart below:

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Source: 3 reasons not to dump your dividends by Holly Framsted, Blackrock

The key takeaway is that ignoring dividends is a bad idea. Holding dividend stocks and reinvesting dividend payments received is an integral part of a well diversified portfolio that is more likely to generate a higher overall total return in the long run.

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • SPDR S&P Dividend ETF (SDY)

Disclosure: No positions