Recessions and booms are part and parcel of the economic cycle.
In recent months, there has been a growing chorus of opinions stating that an economic downturn is on its way.
Even Prime Minister Lee Hsien Loong has chimed in, cautioning that a recession may hit Singapore’s shores either next year or in 2024.
It’s natural to feel worried about whether your investment portfolio can hold up should a severe recession befall us.
Rather than predict when the recession is coming, or whether there will even be a recession, I have found that it is more helpful to prepare for one instead.
By fortifying your investment portfolio, it can better withstand the headwinds that accompany a downturn.
By positioning your portfolio wisely, you can also stand it in good stead to ride the economic upswing that immediately follows every recession.
Here are several tips you can use to stand ready should a recession hit.
Stick with robust blue-chip stocks
Select blue-chip stocks should form a firm foundation for your portfolio.
It makes intuitive sense to do so.
Familiar blue-chip names such as DBS Group (SGX: D05) and Singapore Exchange Limited (SGX: S68), or SGX, have gone through numerous boom and bust cycles.
Having the experience and track record makes these companies more likely to get through the next downturn unscathed.
Their large size, strong franchise and professional management teams also have the competence and expertise to steer the business through rough seas.
It also helps that both stocks pay out a steady quarterly dividend.
DBS Group currently pays S$0.36 per quarter while SGX doles out a quarterly dividend of S$0.08 per share, giving the former a forward dividend yield of 4.4% and the latter a historical dividend yield of 3.6%.
Fortify with strong REITs
With the foundational layer built up, you can then consider fortifying the portfolio further with a bunch of strong, well-managed REITs.
REITs are known for being dependable income instruments as they are mandated to pay out at least 90% of their earnings to enjoy tax benefits.
The key is to select REITs with strong sponsors, high-quality and well-located assets, and which also boast an impressive track record of increasing their DPU through good times and bad.
A good example will be Mapletree Industrial Trust (SGX: ME8U), or MIT.
The industrial REIT has a strong sponsor in Mapletree Investments Pte Ltd, a real estate investment and development company with S$78.7 billion of properties as of 31 March 2022.
MIT owns 141 properties across six property segments with a tenant base of more than 2,000 tenants.
The REIT has also reported an unbroken rise in distribution per unit (DPU) since fiscal 2011/2012.
DPU has increased for 10 consecutive years with fiscal 2022’s DPU at S$0.138, giving the REIT’s units a trailing distribution yield of 5.1%.
Add in a layer of dependable dividend stocks
To keep the dividends flowing while also capturing some growth, you can layer on smaller companies that possess both growth and dividends.
An example of a dependable dividend payer is Sheng Siong Group Ltd (SGX: OV8).
The retailer is not only resilient in the face of downturns but has also managed to grow its store count steadily over the years.
Sheng Siong’s most recent fiscal 2022 first half (1H2022) earnings saw the group report a 2.1% year on year increase in net profit while the interim dividend rose slightly to S$0.0315 from S$0.031 last year.
The retailer has grown its store count by three from 63 last June to the current 66 stores.
Another dependable dividend stock is Micro-Mechanics (Holdings) Ltd (SGX: 5DD), which designs and manufactures tools and parts used in the semiconductor industry.
The group has nearly tripled its annual dividend from S$0.05 in fiscal 2015 to S$0.14 in fiscal 2021.
Keep some cash handy
Finally, it’s always useful to keep some cash on hand to take advantage of any opportunities that the stock market may throw up.
By having some dry powder with you, you can then swoop in to purchase shares of great companies should there be a sharp market downswing.
The market can be volatile in the short-term and share prices can plunge for all sorts of reasons.
Cash may give poor returns while sitting in your bank account, but it opens you up to great opportunities to accumulate when everyone else is panicking and selling.
So, remember to take these tips to heart and you won’t have to worry about your investment portfolio even if a recession does arrive in the next few quarters.
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Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange Limited, Micro-Mechanics (Holdings) and Mapletree Industrial Trust.
