In 2020, the impact of Covid-19 brought about a swift and sharp recession followed by a recovery. Recessions aren’t always caused by surprises. In fact, various economic forecasts are indicating that the UK could be in a slump at the end of this year or early 2023. I can’t accurately forecast what will happen, but what I can do is plan to ensure my FTSE 100 portfolio is recession-ready.
Using spare cash to go defensive
The first point I’m putting in practice is spending the next few months buying defensive stocks. With the spare cash that I don’t need for everyday life, I’m wanting to find some good value shares that should help to protect my overall portfolio.
For example, I like stocks such as Coca-Cola HBC, Associated British Foods, and Aviva. I’d bucket all of these companies in the defensive category. The goods and services provided are staples and shouldn’t see a material decline in demand during a recession.
I recently wrote in more detail about Aviva. It generated a IFRS profit of £2bn last year, with a record level of inflows in its Savings and Investment division. With strong cash flow and a resilient business model, I think it will continue to perform well, come what may.
As a note, I’m not expecting any of the above companies to offer substantial share price appreciation during a recession. Yet if the FTSE 100 drops by a certain amount, I’d anticipate that defensive stocks will fall by less than the index.
Using dividend payers during a slump
During a potential period when the stock market could be in the red, I want to be able to pick up income. This helps to offset any losses on my capital. It also provides valuable cash that I can use to reinvest.
I’m personally looking at utility stocks such as National Grid and United Utilities to fulfill this need. Both companies fit in my defensive category, but also offer above-average dividend yields. Currently, National Grid offers a 4.93% yield, with United Utilities at 4.28%.
It’s acknowledged that I could find stocks with a much higher dividend yield. But at the same time, I’m happy to accept a lower yield as I think the performance should be better during tough times. Some companies offering high dividends now might be forced to cut the income within the next year.
Buying FTSE 100 stocks for the long run
Whether a recession is around the corner or not, the stocks I’m buying are ones to hold for years to come. My long-term investment approach is built on the thinking that over time, the trend of the market is higher. Sure, the above ideas should be able to make a fall in the FTSE 100 more comfortable to manage. But I won’t be panicking during this period and selling good shares that could rebound once the storm has blown over.