Every long-term share market investor should prepare for the worst but expect the best.
Meaning, you should be ready for the tough times (both psychologically and financially – by holding a diversified portfolio and an adequate amount of cash) but also look to invest with optimism.
Prepare for the downturn with these 3 stocks…
At today's prices I can't seem to find too many good buying opportunities among Australia's biggest blue chip stocks.
Excluding miners and the banks, the S&P/ASX200 (Index: ^AXJO) (ASX: XJO) trades at around 19x last year's profit – well above its long-term average.
Miners and banks are excluded (to focus on Australia's industrial companies) because the majority of long-term investors' wealth shouldn't be devoted to these capital intensive, cyclical stocks.
Moreover, the resources boom is done and dusted.
This will have ripple effects on the broader economy, including pushing up the unemployment rate, which in turn will keep confidence – both business and consumer – low for some time.
Therefore, with the economy expected to enter a rough patch, right now appears a better time than ever to identify high-yielding 'recession-proof' stocks to add to your portfolio.
Whilst I firmly believe there is no such a thing as a recession-proof stock, investors can look to benefit from certain trends (including downward trends) by positioning their share portfolios accordingly.
For example, Australia's largest receivables management company, Credit Corp Group Limited (ASX: CCP), may be able to grow its debt ledger book during tough economic times. This debt collector targets consumer and small business debts held by Australian and New Zealand banks, finance companies and telecommunications providers.
Credit Corp shares took a hard hit during the Global Financial Crisis but the company has emerged a stronger and more profitable one. It's currently forecast to pay a 3.8% fully franked dividend.
Another prominent Australian business with countercyclical characteristics is Burson Group Ltd (ASX: BAP) – the specialist automotive parts distributor. Although the correlation may not be statistically significant, during a credit crunch fewer people are likely to purchase new cars and will instead repair older model vehicles – thus, increasing demand for parts.
As Australia's premier automotive parts distributor Burson will likely continue to pay its reliable dividend on a sustainable earnings base for many years into the future.
Finally, Woolworths Limited (ASX: WOW) is worthy of further consideration. Although it may not be countercyclical, its earnings are defensive. Whilst competitive pressures from key rivals Aldi and Coles (owned by Wesfarmers Ltd (ASX: WES)) persists, the selloff of Woolies shares during the past year arguably compensates investors for much of that risk.
A lower share price also means Woolies is currently yielding a fully franked dividend of 4.8%, or 6.8% grossed-up for franking credits.
An even better bet than Woolworths…
