The Motley Fool

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Algonquin and Manulife.

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