Not all sectors tend to cut dividends during recessions. While dividend growth may slow across the board, severe cuts tend to happen in certain sectors. And this makes sense. As consumers and businesses are forced to deal with lower cash flows/earnings during recessions, certain purchases go out the window.
If you want to further improve your chances of making money during a recession, consider buying dividend stocks. Companies that pay a regular dividend are often time-tested, profitable on a recurring basis, and offer transparent long-term outlooks.
The stock market generally falls during recessions (and often at other times when there's no recession). These declines can happen quickly and unpredictably, and even the best investors often don't see them coming. Moreover, the recovery – when the share market starts going back up – is just as unpredictable.
Typically, you'll see your stock portfolio go down during a recession. The dropping stock values partly stem from massive sell-offs as many investors try to get out of the market. As more investors sell their shares, the stock prices fall.
That said, timing a recession is difficult to do, and selling into a falling market may be a bad choice. Most experts agree that one should stay the course and maintain a long-term outlook even in the face of a recession, and use it as an opportunity to buy stocks “on sale.”
Where to put money during a recession. Savings accounts, money market accounts, and CDs are all ways to keep your money at your local bank. Alternatively, you could invest in the stock market with a broker. Let's go over each of these options.
Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
Bonds and cash have historically outperformed most stocks during recessions. Selling stocks in favor of bonds and cash before a recession may leave you unprepared if stocks bounce back before the economy does, which has happened historically during many recessions.
A company may cut or eliminate dividends when the economy is experiencing a downturn. Suppose a dividend-paying company is not earning enough; it may look to decrease or eliminate dividends because of the fall in sales and revenues.
Higher interest rates that often coincide with the early stages of a recession provide an advantage to savers, while lower interest rates moving out of a recession can benefit homebuyers. Investors may be able to find bargains on assets that have decreased in price during a recession.
Stocks: Prices for stocks tend to fall before the downturn begins and almost always before a recession is called. If you're trying to make use of lower prices, you'll likely benefit most if you buy before the recession starts or during its early phase.
In general, a recession lasts anywhere from six to 18 months. For example, the Great Recession that started in December 2007 lasted 18 months. But the recession prompted by the pandemic in 2020 only lasted two months.
Both the employees and firms get hurt by the recession. Employees lose their jobs and are forced to a lower standard of living while the firms undergo abnormal profits.
Tourism and hospitality roles are vulnerable during a recession because consumers change spending habits as the economy shrinks. If a family usually takes a yearly summer vacation, they might rethink that as their companies face looming budget cuts and they question their job security.
Michael Burry from “The Big Short” took a big bet when he shorted the American housing market. After the housing bubble crashed in 2008, he made $100 million for himself, with investors in his fund making a further $700 million.
It's especially important to have savings during a recession, however, because economic uncertainty can create other financial concerns, such as layoffs. A surprise job loss can be stressful, but if you're cushioned with an emergency fund, it can be easier to pay for your expenses until you get a new position.
For example, you'll want to avoid becoming a co-signer on a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt. Workers considering quitting their jobs should prepare for a longer search if they decide to find a new one later.