Our 2023 'Recession-Resistant' Game Plan

Look, we’re probably going to see a recession in 2023. And if you’re like most folks, you’re wondering how to respond.

Here’s the good news: overall I see a much better year ahead than the mess we lived through in 2022. But we could see a pullback—and a recession—before the market bottoms and bounces.

That leaves us contrarian dividend seekers in a tricky spot. It’s why we’ve held a lot of cash in my Contrarian Income Report service over the last 12 months.

But I also hear from a lot of folks who want stocks they can hold no matter what, to keep their payouts rolling in.

I get it. I feel the same way myself. Unfortunately, there’s no such thing as a stock that pays a high dividend and never falls. (If there were, your income specialist would be out of a job!)

But there are things we can do to secure our income streams in a pullback—and even use a market decline to our advantage—while holding for the long haul.

For one, we can use dollar-cost averaging (DCA) to move into our dividend payers. By investing a fixed amount on a fixed schedule, we’re naturally “timing” the market, buying more when stocks are cheap (as in a recession) and fewer when they’re pricey.

And we can focus our DCA plan on stocks with what I like to call “recession-resistant” dividends. In addition to high—and ideally growing—payouts, these companies have:

1. Strong cash flows.
2. Reasonable payout ratios (or the percentage of free cash flow occupied by the dividend—more on this below).
3. Megatrend-backed businesses.

Now let’s move on to two sectors—and two stocks—that meet these benchmarks.

To be sure, energy would take a hit in a recession. But over the longer term (I’m talking months to years here), I like its outlook. The crash ’n’ rally pattern I’ve written about before on Contrarian Outlook is alive and well. Here’s how it played out from 2008 to 2012—and how it’s repeating today:

1. First, demand for oil evaporates due to a recession. The price of oil crashes (2008 and 2020).
2. Next, energy producers scramble to cut costs. They cut production aggressively (2008 and 2020).
3. Then, the economy slowly recovers. Energy demand picks up (2009 to 2012, 2020 to today).
4. But there’s not enough supply! So, the price of oil climbs and climbs and climbs (2009 to 2012, 2020 to today).
5. Energy producers bring supply back online, but it takes time to explore and drill. Supply lags demand for years, and the price of oil climbs and climbs (2009 to 2012, 2020 to today).

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“Sure, Brett,” you’re probably thinking. “But haven’t oil prices been stuck in a rut for months now?”

Yes! But remember that oil is being artificially held down by the Biden Administration’s drawdowns from the Strategic Petroleum Reserve. Eventually, those drawdowns will have to be replaced, driving up oil prices (and demand!).