In a few weeks time we will know if the UK has entered a dreaded triple-dip recession. So wouldn't it be good if you could assemble a portfolio of shares that could weather an economic downturn?
You can recession-proof your portfolio with defensive shares, so called because the companies should be able to deliver stable profits regardless of the economy.
So what are these companies? Utilities such as National Grid, Severn Trent and United Utilities are good examples. We all need water, gas and electricity regardless of economic conditions.
Supermarkets are generally also seen as defensive because we all have to eat. Consider Sainsbury's, which has seen profit rise from £500m to £700m. It is also worth noting that it has lifted its dividend by 70 per cent over the past four years. This is not unusual because defensive shares can often generate cash.
Another cash generating defensive share is British American Tobacco. Its dividend has almost doubled from 70p to 130p a share in four years. Its defensive qualities are obvious – it products can be addictive, so smokers put a higher priority on the purchase of cigarettes even when the economy may be in the doldrums.
The pharmaceutical industry is another interesting defensive sector. GlaxoSmithKline has only seen an 8 per cent rise in sales over the past four years. But, it has ratcheted up its dividend at an inflation-busting rate of 7 per cent a year in the same period.
The alcohol industry is often seen as defensive. We might not go down to the pub as often when the economy is bad but we will still have a drink at home. SABMiller, the UK's largest quoted brewer, has seen sales increase 30 per cent since 2008. Its profit has also grown, enabling it to hike its payout to investors from 25p per share in 2008 to 52p per share in 2012.
These companies can be the workhorse of any portfolio.
David Kuo is director of fool.co.uk
- More about:
- National Grid
- Severn Trent