You should treat October’s market correction as a wake-up call if your portfolio took a greater amount of damage as the indices. If your portfolio fell substantially more than that 10% last month, then odds are, you’ve got a portfolio that’s overweight in higher-growth or cyclical stocks and underweight in defensive dividend stocks, which have fallen out of favour over the past year due to the rising interest rate environment.
While a portfolio that’s overweight in cyclical stocks can provide you with amplified returns in an upmarket, potential loss will also be magnified in a down market. So, it’s essential to have a properly balanced portfolio that’ll allow you to achieve the highest risk-adjusted return given the fact that we’re on the tail end of the most extended bull market in history.
But what does a risk-adjusted return mean?
In simplistic terms, it’s a return that’s been adjusted for the amount of risk a security (or portfolio of securities) would expose you to if you were invested in it. Many hedge funds and other actively managed portfolios strive to achieve superior risk-adjusted returns that are ultimately measured by the Sharpe ratio, a metric that considers both return and risk.
In an environment with such high geopolitical risk with an overly hawkish Fed, it’s only prudent to consider valuing stocks that also limit your potential downside rather than just focusing on upside potential. You may be breathing a huge sigh of relief now that October’s over, but we’re not out of the woods yet, as the pain from last month could easily continue until year end.
So, if your portfolio is in need of adjustment, you may want to consider Fortis (TSX:FTS)(NYSE:FTS), a one-stop-shop defensive dividend play that I’ve been pounding the table on over the past year while loading up on it for my personal portfolio.
You may be thinking, “What’s the point of playing defence when the damage has already been done?” Well, we’ve hit a small bump in the market that I believe investors should treat as a portfolio stress test. If a recession does arrive at some point over the next three years, we could realistically see much steeper losses, and you will have wished you’d punched your ticket to Fortis earlier to pad your downside.
Fortis recently clocked in better-than-expected adjusted Q3 earnings of $0.65 per share, up 6.6% on a year-over-year basis. Management was quick to extend its 6% annual dividend-growth promise by another year to 2023. The company continues to put its foot on the growth pedal, and over the next few years, we’re likely to see operating cash flows and regulated debt being funneled towards cash flow-boosting projects.
Foolish takeaway
With Fortis, you’re getting a rock-solid dividend, a promise of dividend growth, and a growth profile that would put most other highly regulated utilities to shame. Higher rates are a burden for the company, but when you consider the discount slapped on shares at $43, I’d say the stock is a must-own when you consider where we’re at in the market cycle.
Stay hungry. Stay Foolish.
