When setting your portfolio up to be as well prepared as it can be for a recession, there are a few main things to consider.
Avoiding certain industries that are most susceptible to a reduction in spending is the first and most important thing, but there are other additional steps to position yourself more optimally.
Things such as gaining exposure to gold, whether through bullion or gold mining stocks, holding larger cash positions than normal, and buying defensive stocks are just some of the ways to better position yourself.
Some of the top-performing companies in recessions are income-generating stocks and ones in defensive industries, and some of the top companies that fit the bill are real estate investment trusts (REITs).
Not just any real estate stock will do, though, as ones with a heavy reliance on industrial companies or those that have a large portion of their portfolio in retail operations could see an impact to their business due to the counterparty risk that exists.
The best real estate companies to consider are residential ones. Residential real estate is more defensive because it’s an industry that serves a major need in the economy, and even if some tenants have issues paying the rent, these companies have a lot more tenants, which helps to dilute those tenants who fall short of paying their rent on time.
One stock that is a leader in residential real estate in Canada is Canadian Apartment Properties REIT (TSX:CAR.UN).
Canadian Apartment Properties is a massive $9 billion company with operations across Canada as well as in the Netherlands.
The company has been on an acquisition spree recently, building its portfolio of both apartment suites and manufactured housing community (MHC) sites.
So far in the first nine months of 2019, it’s already spent roughly $1 billion to acquire more than 8,000 suites and sites for its portfolio.
During that same period, the company has done roughly $570 million in operating revenue, an 11% increase from the first nine months of 2018. It has converted that operating revenue to roughly $250 million in normalized funds from operations (NFFO) — a 14% increase from 2018.
The increase to its NFFO gives it a payout ratio of just 65%, which is extremely stable and will continue to grow alongside its NFFO.
You can count on the continued growth in the dividend, barring any major unforeseen problems, because Canadian Apartment Properties REIT is one of the top Canadian Dividend Aristocrats, especially in the real estate sector.
Although it’s an aristocrat that pays a decent yield of roughly 2.5%, if you are buying Canadian Apartment Properties REIT, you are buying it for its stability and incredible growth.
On the stability side of things, the company is very well-run, keeps a sustainable payout ratio, and has a 99.2% occupancy rate in its residential suites portfolio and a 97.3% occupancy rate in its MHC portfolio.
On the growth front, it continues to grow mainly through acquisitions to build its portfolio, which has resulted in the share price increasing roughly 80% the last three years.
What’s really impressive is that Canadian Apartment Properties has achieved these massive growth rates without over leveraging itself and keeping its debt ratios relatively flat.
Its interest coverage ratio is roughly 3.5 times and its debt service coverage ratio is roughly 1.8 times.
It’s a top recommendation for any investor looking to play things defensively while also giving yourself exposure to high-quality and reliable passive-income growth, especially ahead of what looks to be an inevitable recession lurking around the corner.
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.
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