Recession-Proof Stocks: The Best Stocks to Buy for a Recession

What is a recession?

A common definition of a recession is two consecutive quarters in which the U.S. economy has shrunk, as measured by the growth rate for gross domestic product (GDP).

This concept applies to other nations, the global economy and even other financial metrics.

For instance, some stock market analysts will refer to an "earnings recession," where the average growth rate of the largest stocks has been negative for two quarters in a row. The most recent earnings recession occurred in late 2022 through mid-2023.

Generally, "recession" means a sustained decline rather than a short-term disruption.

Recessions can happen for many reasons: a global financial crisis like we saw in 2008, geopolitical unrest such as the wars in Ukraine or Gaza or even a global pandemic.

Although economists and traders alike sometimes detect waning momentum, unexpected events are often to blame for meaningful downturns that catch even the smartest businesses, consumers and investors by surprise.

The best recession-proof stocks

Whether you're worried about short-term troubles or you just want a resilient portfolio that stands up to the unexpected, your approach to identifying the best stocks to buy should be similar.

Here's what to look for when researching recession-proof stocks:

Avoid cyclical stocks: The economy tends to run in cycles, and some businesses do very well when things are booming but suffer mightily when recession strikes.

These are called "cyclical stocks" because they're very sensitive to trends in business or consumer spending.

Think of hotels that depend on strong travel spending, automakers that sell high-priced cars or retailers that rely on Americans taking frequent trips to the mall.

Stick to defensive sectors: Defensive sectors may not have as much upside when things are booming, but they tend to be more stable when things get tough.

Examples of defensive stocks include electric utilities and businesses that sell consumer staples such as soap and packaged foods. You don't stop turning on the lights, showering or eating just because the economy is a bit rough, after all.

Defensive stocks depend on strong baseline demand through the economic cycle.

Go bigger: It's generally true that the larger companies on Wall Street are more stable than the smaller ones. They have cash reserves to fall back on, not to mention big brand names and rich histories.

And they have what Warren Buffett characterizes as "moats" of safety to protect them from short-term disruptions.

Although smaller companies can move more quickly to take advantage of new opportunities, they're usually among the first to suffer when times get tough. Going bigger helps reduce your risk profile.

Prioritize dividends: Large companies with stable profits often spread the wealth via regular dividends.

This flow of profits back to shareholders sweetens total returns, which is nice. It also establishes a level of reliability in underlying operations. Cutting dividends is a huge black eye for a stock.

A business that generates cash flow sufficient to support regular payouts — and, in the best-case scenario, backs one of those stocks known for dependable dividend growth — should give you confidence through the economic cycle.

Data is as of November 14.

Altria Group

• Market value: $106.6 billion
• Sector: Consumer staples
• Dividend yield: 6.7%

It's hard to find a stock that provides more stability than tobacco giant Altria Group (MO).

This consumer icon is among the best recession-proof stocks to buy for long-term stability and consistent dividends, with a yield that's more than five times the S&P 500's 1.2% payout.

Those dividends are likely to keep growing: Altria has an amazing track record of 60 dividend increases over the last 56 years — and that’s despite not a lot of growth in cigarettes.

At the same time, Altria has generated strong earnings year after year thanks to its powerful brands, including Marlboro cigarettes, Skoal smokeless tobacco and NJOY vaping products.

MO might not double your money this year. But if you want a defensive investment, it's a go-to option among consumer staples stocks.

Digital Realty Trust

• Market value: $60.6 billion
• Sector: Real estate
• Dividend yield: 2.8%

Real estate investments can be risky in a recession as troubled shops struggle to pay rent at their storefronts, and homeowners risk foreclosure.

Digital Realty Trust (DLR) is a unique opportunity in the sector because, while it owns a bunch of property, its business is data centers and colocation services that power the digital economy.

After all, the data stored in "the cloud" has to live on servers somewhere — and DLR owns the hardware for major clients including Amazon.com (AMZN) and Oracle (ORCL).

As such, DLR isn't subject to the same pressures as real estate firms serving brick-and-mortar retailers or corporate office space.

It is, however, structured as a real estate investment trust, or REIT, and must deliver 90% of taxable income back to its shareholders, creating a mandate for big and reliable dividends.

With more than 300 data centers worldwide and operations that span more than 25 countries, this is one of the best REITs to buy, because it has both the scale and expertise to weather most downturns.

Lloyds Banking Group

• Market value: $76.2 billion
• Sector: Financials
• Dividend yield: 3.9%

London-based Lloyds Banking Group (LYG) has been around since 1689. It's one of the oldest and most respected banking and insurance firms in the world.

But perhaps LYG is not as familiar to you as other financial stocks such as JPMorgan Chase (JPM). LYG's share price is up almost 40% for the trailing year, driven by investors rotating into the relative stability of European stocks when compared to their American peers.

Bank stocks can be highly cyclical investments, as mortgages and business loans are dependent on consumers and entrepreneurs feeling good about their finances. But while the U.S. stocks are facing recession risks, LYG is cruising along just fine.

The firm is no small fry in the sector, either, and is on par with regional banks such as M&T Bank (MTB) or insurer American International Group (AIG) in size.

If you're worried about the impact of a U.S. economic downturn, this established U.K. leader is a top recession-proof stock to buy now for international diversification.

Lockheed Martin

• Market value: $143.6 billion
• Sector: Industrials
• Dividend yield: 2.2%

In an age of geopolitical uncertainty, aerospace and defense leader Lockheed Martin (LMT) stands out for its opportunity to succeed in the years ahead.

The second Trump administration is focused on cutting all manner of government programs. But long-standing Republican loyalty to the Department of Defense means significant cuts for military contractors such as LMT are unlikely. Indeed, war in the Middle East signals quite the opposite.

Lockheed is one of the long-term leaders in the defense sector thanks to past innovations such as the F-35 Lightning, the F-117 Nighthawk stealth fighter, the F-16 Fighting Falcon and other impressive war machines.

From an income perspective, the blue chip stock has a strong record of dividends with a generous $3.45 quarterly payout that's more than double what it was a decade ago.

While there's risk to certain businesses in a downturn, chances are that Lockheed, like many recession-proof stocks, enjoys historical benefits that insulate it from any cutbacks.

NextEra Energy

• Market value: $189.9 billion
• Sector: Utilities
• Divided yield: 2.7%

Utilities are always go-to stocks during an economic crisis, as power is a necessity supported by strong demand through good times and bad.

NextEra Energy (NEE) is the largest publicly traded utility on Wall Street. That makes it the logical choice in the sector and one of the best recession-proof stocks for investors.

NextEra bills itself as the world's largest generator of wind and solar energy and is rapidly diversifying its portfolio of energy-generation facilities. A long-term focus ensures it stays profitable and in line with any sustainability goals in the future.

After a recent 10% increase in its dividend to 62 cents per share each quarter, the stock's dividend yield is 2.7%. With payouts only about 60% of next year's earnings, NextEra has plenty of room for future increases.

That makes NEE safe from any near-term volatility that may strike the U.S. economy and makes it one of the best recession-proof stocks.

How to prepare your portfolio for a recession

The desire to be defensive and protect your hard-earned cash is natural. But it's important to note that by simply investing in recession-proof stocks, you'll probably leave some long-term profits on the table.

If you completely ignore growth stocks, including smaller start-ups and/or aggressive tech disruptors, you might be disappointed when you don't share in the good times as often as your peers.

And even the best recession-proof stocks can stumble — there's no guarantee your money is 100% protected either way.

A balanced approach is almost always the best course of action, then. That includes recession-proof stocks as well as other instruments in a diversified portfolio built to provide consistent returns through market cycles.

Your personal risk tolerance informs how much or how little of each investment you focus on. The bottom line is that going "all in" on recession-proof stocks may be just as risky as putting every penny behind small and risky growth stocks.

Looking at the whole array of options out there is usually the best course of action for the typical investor.

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