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.
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.
Even during market crashes, most dividend stocks – especially the aristocrats and kings – continue to pay dividends. This is because these companies often have steady revenue and earnings since they are already at the maturity stage of their business life cycle.
When you invest during a bear market in a solid company with a history of increasing its dividend payments, you obtain a degree of comfort that you'll receive cash flow while you own that stock. Even if the shares lose value during a bear market, you'll receive income from your dividends.
Companies may cut dividends in response to an economic downturn, a spate of negative earnings, or more serious threats to the company's health.
Australia could face per-capita (if not actual) recession
Throughout 2023, the panel expects economic growth of just 1.2% in the US and historically weak growth of 4.9% in China, suggesting Australia's biggest customer for minerals will be unable to provide much help as Australia's own economic growth dwindles.
What would a recession mean for Australia? If Australia enters a recession, many people will have a tough time, whether through job loss, home loss, or even just a struggle to pay the bills. Whole markets will tank or lose significant value and many businesses will likely go bankrupt.
Consumer staples, utilities, healthcare, streaming, discount store, and even fast food stocks all have a record of positive performance during recessions. Commodities like gold are yet another category of recession-proof stocks because when all else fails, gold stays up.
When things are looking bleak, consider holding on to your investments. Selling during market lows can be one of the worst things you can do for your portfolio — it locks in losses.
What are some examples of businesses that thrive in recession? Due to the elasticity of demand, recession-proof industries are usually in essential services, like health care, senior services, grocery stores, and maintenance, such as plumbing and electrical.
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. When a recession is on the horizon, it's impossible to know how long it will last.
Historically, gold prices have remained stable — or even experienced an upswing — during recessionary periods. According to data from Schroders, a global investment manager, both gold and gold equities have performed well through five of the past seven recessions going back to the early 1970s.
It's not always easy to hang on. Uncertainty about what's coming next can make investing excruciating. But you may find some comfort from the past. Stocks have always bounced back after previous recessions, sometimes quite rapidly.
ITR Economics is forecasting that a macroeconomic recession will begin in late 2023 and persist throughout 2024. Business leaders recently had to lead their companies through the recession during the COVID-19 pandemic, and some were even in leadership positions back in 2008, during the Great Recession.
Australia's economy was buoyed by large resource exports to China, whose economy rebounded quickly after the initial GFC shock (mainly due to expansionary fiscal policy).
Interest rates usually fall during a recession. Historically, the economy typically grows until interest rates are hiked to cool down price inflation and the soaring cost of living. Often, this results in a recession and a return to low interest rates to stimulate growth.
Recessions last 11 months on average. The last recession that Australia faced in the early 90s lasted from September 1990 to September 1991.
You can keep money in a bank account during a recession and it will be safe through FDIC insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Prices could fall further
If you buy in a recession, there is always the risk that prices could fall even further. That said, Australian property prices usually tend to rise in the long run, especially in capital cities. So if you're prepared to spend some time owning your property, you're likely to come out ahead.
A company that is still growing rapidly usually won't pay dividends because it wants to invest as much as possible into further growth. Mature firms that believe they can increase value by reinvesting their earnings will choose not to pay dividends.
As part of a diversified portfolio, dividend stocks have their place. They offer relative stability, may pay increasing amounts over time and may provide steady income. But relying too heavily on dividend stocks as a primary investment approach could put you at risk and reduce your long-term investment gains.
But investors should be wary of chasing high dividend stocks, as all might not be as it seems. A company's high dividend might be because its stock has suffered a significant drop in share price, suggesting financial trouble that could imperil its ability to make future dividend payments.
Gold, for example, has long been known as a safe haven investment. It tends to be a smart hedge against inflation, and many experts recommend buying it ahead of recessions, too.