It’s been a nasty start to 2018 for the TSX, starting the year with a very sharp ~8.5% peak-to-trough plunge, which carried into February. The index has since partially rebounded, but before you back the truck up on your favourite stocks, it may be time to treat the decline as a wake-up call if you’ve neglected the defensive portion of your portfolio. We’re in the late stages of a bull market, and sooner or later the markets will crash, violently, whether you’re ready or not.
Moreover, I also think it’d be a very wise move to increase your exposure to low-beta defensive stocks, while trimming positions in companies that have surged above and beyond what’s realistic. That way, another crash won’t come as a surprise to you, and your lack of panic will lessen your chances of making a rash decision, which would hurt your long-term results.
With the recent volatility, here is a top defensive dividend stock that I believe has a huge margin of safety and stands to be punished less severely once the next crash happens.
Enter Fortis Inc. (TSX:FTS)(NYSE:FTS), a premier defensive powerhouse that’s down ~12% off from its 52-week high on fears of higher interest rates. At this point, I believe the damage is way overdone, and those looking to fortify their portfolios have the opportunity to pick up shares at a discount.
Sure, higher rates are bad for the utilities, but we also have to remember to consider the businesses behind the stocks! Fortis is firing on all cylinders and has the ability to grow its dividend by 6% annually through 2022, regardless of what state the market is in.
Fortis currently has a dividend yield of 3.95%, which is above the mean for utilities and will pad the volatile times when things start getting really ugly. Add this to the fact that Fortis shares will likely fall at a much lower magnitude versus your average non-defensive stock, and you’ve got a holding that can serve as a foundation for your TFSA, allowing you to focus your attention on buying on sharp declines, rather than worrying about how badly your portfolio stands to get hit.
The stock currently trades at a 18.7 trailing P/E, a 1.4 P/B, and a 6.5 P/CF, all of which are lower than the company’s five-year historical average multiples of 20.7, 1.5, and 7.5, respectively. The trailing P/E and P/CF are also slightly lower than the industry average of 19.1 and 6.9, respectively.
Your TFSA portfolio is your nest egg, and you should protect it with undervalued defensive dividend stocks like Fortis. In these uncertain times, you’re getting a rock-solid stream of income and a guarantee of an annual raise of at least 6%.
I picked up shares for my personal TFSA on the recent dip and would encourage Foolish investors to do the same to protect themselves from a bear market, which, I’m sure you’ll agree, we’re way overdue for!
Stay hungry. Stay Foolish.
Discover how you can get ready for the next crash in our brand new, exclusive report, "The Bear Market Survival Guide: How To Prepare For The Next Market Correction". In this report, we share the 7 strategies that our company has used to get through catastrophic market crashes while producing a huge number of market-beating stock picks in countries across the world (including Canada!).
Fool contributor Joey Frenette owns shares of FORTIS INC.