Anyone who's been following the markets during 2019 would have picked up on the almost incessant talk of 'the next recession' and when it's coming.
Between the Trump trade wars, interest rate cuts and the yield curve inverting, there always seems to be something pointing towards the doomsday clock.
This has made retirees and other income investors very worried (understandably). Record low cash rates mean that bonds, term deposits and other cash or fixed-interest investments traditionally used as portfolio protection are now yielding barely anything, meaning that more investors are being reluctantly pushed into the share market.
Although stocks are inherently more risky than other investments, I think dividend-paying shares are the best way of protecting your wealth against a looming downturn.
How do dividends protect against a recession?
Well, unlike share price returns (which you can only bank if you sell the stock), dividends keep on rolling through the door as long as you hold the company. That means that even if your shares get hit in a market crash or recession, cash from your dividends can help cushion your portfolio against those paper losses.
Of course, not all dividends are equal. Buying shares of a company like Sydney Airport Holdings Pty Ltd (ASX: SYD) is generally considered a lot safer than something like JB Hi-Fi Ltd (ASX: JBH) or even Commonwealth Bank of Australia (ASX: CBA). These companies (and their earnings) will likely get hit by a recession a lot more than a monopolised airport.
Listed investment companies (LICs) like Australian Foundation Investment Co. Ltd (ASX: AFI) are also worth considering. LICs have the power to hold cash in reserve for when it's needed most. That's how AFI could get away with not cutting its dividend at all during the GFC – something its shareholders were very grateful of.
Foolish takeaway
If you're worried about a recession (which is very prudent, seeing as we haven't seen one for a while), have a think about the dividend shares you hold in your portfolio and how likely they are to cut their dividends if the economy goes south.
Rather than trying to time the market and go to cash, just be confident in your holdings and the dividends they pay, and you will come out of the wash looking ok!
