by Mike Scanlin

The good times will come to an end, as they always do, at least for a while. When that happens, what will you do? Go to all cash and wait for the inevitable recession to pass? That could take years. And during that time, while you may be avoiding capital losses, you won't be earning any dividends or covered call income.

A perhaps better strategy is to own at least a few stocks that tend to do well (or at least not poorly) during a recession. Historically, some categories of stocks do better than others when times get tough, while others do not.

Poor Performers During Recession

People have less discretionary spending during a recession, so those kinds of stocks tend to do worse (see Stocks To Sell Before The Recession Hits). Those would include:

• Airlines & Cruises
• Hotels
• Casinos
• Financials

But during a recession people still need to eat, get medical treatments, and have their basic needs met. Categories that tend to do better during a recession include:

• Fast food
• Health care
• Discount retail
• Alcohol & tobacco
• Essential household goods

You typically also want dividend paying stocks during a recession. The dividend yield acts as a brake on falling stock price. At some point the yield is too juicy not to own, and it supports the stock price (assuming the dividend is stable, which is why you want to look as stocks that have a long history of paying and increasing dividends).

3 Companies To Consider

During the last major recession (2007-2009) 3 of the companies that did well are WMT, MCD, JNJ. They fit the thesis of (1) essential household goods, (2) inexpensive food, and (3) medical/health. Each of them ended up with positive returns over that 3-year period, and 2 of them had double digit returns (WMT & MCD).

Dividends

WMT has a modest dividend yield of 1.5%, while MCD is 2.4% and JNJ is 2.6%. All 3 have a strong history of raising dividends for over 40 years. These well-managed companies are unlikely to break their hard-earned dividend streak.

Covered Calls

If you look at near-term covered calls (expiring Jan 15), there are several in-the-money choices paying over 20% annualized return:

If you look further out, to the Feb 19 expiration, then all 3 have earnings prior. Maybe consider something deeper in the money to make up for the earnings risk:

There's nothing wrong with earning 11% during a recession (should that happen).

8% Return With 12% Downside Protection

Two other choices worth mentioning are the JNJ 140 and 145-strikes for the Mar 19 expiration. You can earn 8% or 10% return (thanks to the call premium plus the 1.01 dividend that goes ex-div on Feb 22), and still have over 9% or 12% downside protection. JNJ is around 158 right now, and you'd have a profit if it was over 138.82 or 143.12 by Mar 19:

Whether you choose these stocks or others like them, now might be a good time to lighten up on more speculative names that might be in your portfolio and have done well recently.

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.