by Moe Zilla

Created on: July 30, 2010

A recession isn't bad for everyone. Certain investments actually perform better during times of economic uncertainty. When the stock market was rising, gung-ho investors may have been rushing after the trendiest growth prospects, ignoring stable and solid stocks because they wanted to maximize their returns. But during a recession, the whole stock market suffers. And suddenly those reliable and regular earnings start to look pretty good.

The most reliable stocks are the ones that routinely pass on a piece of their profits to the investors, in the form of a regular dividend.  This seems more common in some Industries than in others - for example, biotechnology companies often reward investors with dividends (as a kind of thank-you for funding all the years of research that ultimately produced their profitable pharmaceuticals). And many consumer goods companies also seem to be paying a lot of dividends throughout the year. After all, no matter what's happening during the economic recession - people still have to buy the necessities like shampoo and toothpaste!

During a recession, dividend-paying stocks are in high demand, so their price tends to hold its value (as more of those gung-ho investors suddenly scramble for safer forms of income.)  Unfortunately, there's a limit to how much you can do to maximize your return during a difficult recession. A Citigroup stock strategist once admitted to the New York Times, "I don’t think there’s a way to recession-proof a portfolio. There’s only a way to mitigate risk." His advice was to avoid the stocks of any company which makes unnecessary luxury items - since those are the first things that people stop buying when the economy hits a recession!

In 2009, The Motley Fool assembled a remarkable list identifying the 10 stocks which had racked up the best total return through the last major recession (which started in 2001). Right away, they noticed a pattern. "Every one of the top 10 stocks was either a small cap or a mid cap. This shouldn't be surprising, because small caps not only outperform during recessions, but are also overrepresented among the highest-performing stocks in general." But they took a hard look at the table, along with the example of investors like Warren Buffet, and came to a simple affirmation of that age-old investing wisdom.

"The smart thing to do right now is to continue to invest in great companies at reasonable prices."

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