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How do you expect your model Yield Hog Dividend Growth Portfolio will perform if a recession occurs?

Let me start with a disclaimer: I don’t have any special insight into how the stock market in general, or my model portfolio in particular, will perform over any short-term period, whether it’s during a recession or expansion. There are so many factors that come into play – interest rates, geopolitical events, earnings, investor sentiment, company-specific events – that predicting the short-term direction of stock prices is a fool’s errand.

It’s also far from clear that a recession is imminent, although trade frictions and slowing global growth have some people worried that the economy could take a dive next year.

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I am, however, prepared to make a couple of predictions.

First, regardless of what happens in the short run, the companies in my model portfolio will likely continue to increase in value over the long run. Stock prices reflect expectations about the earnings of the underlying businesses, and if those earnings are growing, share prices should ultimately rise as well. The upward trajectory won’t necessarily be smooth; there could be weeks, months or even years when prices go sideways or drop. So, as pleased as I am with the model portfolio’s total return of 24.6 per cent (11.6 per cent on an annualized basis) in its first two years of existence, I fully expect that the future will bring periods of short-term turbulence. I just don’t know when.

The second prediction I’m prepared to make is that, even in a recession, many of the companies in my model portfolio will likely continue to raise their dividends. Unlike share prices, which bounce around in the short run, dividends are more stable and predictable. This is especially true for companies that earn a regulated return, have a well-entrenched market position or whose cash flows are governed by long-term contracts.

Let’s back up a decade or so to illustrate what I mean.

The financial crisis of 2008 and 2009 was an exceptionally scary time for the global economy. But many utilities – including Fortis Inc. (FTS), Emera Inc. (EMA) and Canadian Utilities Ltd. (CU) – continued to raise their dividends annually, just as they’d done before the downturn. The same was true for pipelines such as Enbridge Inc. (ENB) and TC Energy Corp. (TRP), formerly TransCanada Corp.

Canada’s three major telecom companies – BCE Inc. (BCE), Telus Corp. (T) and Rogers Communications Inc. (RCI.B) – also continued to increase their dividends annually, with a brief pause in some cases. Canada’s major banks also maintained their dividends, but put increases on hold for several years. Granted, there were some dividend cuts in Canada – Manulife Financial Corp. (MFC) being a high-profile example – but these were the exceptions.

For what it’s worth, now let’s look at how stock prices – including some of the holdings in my current model portfolio, which was launched on Oct. 1, 2017 – performed during the financial crisis.

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From its high in June, 2008, to its low in March, 2009, the S&P/TSX Composite Index registered a peak-to-trough decline of 49.8 per cent. Banks were a big contributor to that drop, but some companies got off comparatively lightly. Canadian Utilities, for example, fell just 15.7 per cent in price, Emera slid 18.2 per cent and Fortis was off 20.6 per cent. A&W Revenue Royalties Income Fund dropped just 10.5 per cent, proving that people still like their Teen Burgers even in a recession.

The average price decline of the model portfolio stocks during that period was 36 per cent. (Note: Six of the portfolio’s 22 securities did not exist at the time, so the average is based on 16 holdings). But here’s the thing: All of the stocks subsequently recovered and are now trading at sharply higher prices and paying bigger dividends, which underlines the importance of taking a long-term view.

Stock-market rebounds are typical after economic downturns. There have been nine U.S. recessions since 1957, and the S&P 500 has gained an average of 15.3 per cent in the 12 months after the end of the economic contraction, according to data in the Wealth of Common Sense blog. Three years after the recession, the S&P 500 was up an average of 40.1 per cent. During the recession itself, the average S&P 500 decline was 1.5 per cent.

Some investors think the secret to making money is to sell before a recession hits and buy back in when the coast is clear. The problem with that approach is that investors all too often miss the rebound. A more effective – and less stressful – strategy is to accept that stock prices will occasionally fall and just roll with it. If you buy strong companies or diversified funds and hold them through good times and bad, history indicates that you will be rewarded.

E-mail your questions to jheinzl@globeandmail.com. To view John Heinzl’s model Yield Hog Dividend Growth Portfolio, go to tgam.ca/dividendportfolio.

Special to The Globe and Mail

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