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How to Invest Defensively in This All-Time-High Market

The Canadian market hit a low in March 2009. And we’re in the ninth year of a bull market. The Canadian market didn’t nearly do as well as the U.S. market, though. Using iShares S&P/TSX 60 Index Fund as a proxy, it doubled from the 2009 low, while the U.S. market, represented by SPDR S&P 500 ETF Trust, more than quadrupled.

The underperformance of the Canadian market had to do with its meaningful exposure to energy and materials — particularly, oil and gas producers, such as Crescent Point Energy and Baytex Energy, and miners, such as Barrick Gold, have done poorly for a number of years. There may be a time when they’ll soar again, but it could be a long time before that happens.

In the meantime, the market can very well experience a correction over the next few years. Here’s how you can invest defensively.

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Invest in defensive dividend stocks

Utility and consumer staples stocks are usually more defensive and stable. Utilities also offer above-average dividends.

One utility stock that has shown some life recently is Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN). In the last month, the stock has appreciated about 10%. Yet it still offers a competitive yield of about 4.8%. Moreover, its growth story is far from over.

Algonquin only began its global expansion in March by investing in Atlantica Yield and partnering up with a Spain-based company that develops and constructs global clean energy and water infrastructure assets. These relatively new endeavours should open the door to a wealth of global growth opportunities for many years to come.

Meanwhile, Algonquin’s sturdy portfolio of regulated utilities and largely long-term contracted power generation support its dividend. Over the next few years, Algonquin has the potential to grow its dividend by about 8-10% per year.

Look for value and growth

Look for companies with growth that’s at least double the long-term rate of inflation — that is, 6-8%. Better yet, buy these companies when they’re cheap.

Manulife Financial (TSX:MFC)(NYSE:MFC) offers value and growth in one stock. At $23.30 per share as of writing, Manulife trades at a cheap forward multiple of about 8.5. Yet the company is estimated to grow its earnings per share by about 10-12% per year for the next three to five years.

Manulife also offers a safe yield of about 3.8%. Additionally, it has a history of growing its dividend. Its five-year dividend-growth rate is about 11%.

Summing it up

Investing in safe dividend stocks allow you to earn dividend income, which is more defensive than investing in pure growth stocks that would likely fall hard in a correction.

Investing in dividend stocks that offer value and growth adds another layer of defence. For a third layer of defensive, hold more cash on hand. If you don’t see anything that’s worth buying, simply collect dividends and let the cash pile up; you’ll have dry powder ready for deployment in a correction.

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Fool contributor Kay Ng owns shares of Algonquin and Manulife.

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