The market correction is becoming a full-blown bear market. Trillions of dollars in value have vanished in a matter of days, which is making retirement savers nervous.
With the right stocks, there’s no reason to be nervous, however. Some companies can actually gain in value during a pullback. You just need to know which stocks are capable of such a performance.
Here’s where to look
When it comes to avoiding volatility, one of the best places to look is utility stocks. These companies deliver community services like water, natural gas, and electricity.
Do you limit your water consumption during a recession? Do you refuse to heat your home or charge your devices? The vast majority of us do not.
And while we all look for ways to cut costs, basic necessities like powering a home or business create stable demand for utilities. During the financial crisis of 2008, for example, Canadian electricity demand decreased by only a couple percent, only to rebound the very next year.
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This is the stock
Investing in stocks that can generate a stable profit in any economic environment is a winning strategy during a downturn. One of the safest utility stocks in Canada is Fortis Inc. (TSX:FTS)(NYSE:FTS), which offers a bulletproof 3.6% yield. While that payout isn’t as high as other stocks, wait until you see how durable this business is.
This might be your number one bet during a bear market. What makes Fortis so special?
Fortis was founded in 1885 as the St. John’s Electric Light Company. Today, it owns 10 electric and gas utilities with $53 billion in assets. The company services more than three million customers in Canada, the U.S., and the Caribbean.
Here’s the critical part: 99% of earnings come from regulated sources. If you know anything about rate-regulated utilities, this is a game changer.
Market forces often make utilities natural monopolies. Think of an internet provider. It costs billions to build a fibre network. Once an area is covered, it usually doesn’t make sense for other companies to replicate the infrastructure, which is why there’s often just one or two service providers in a given area.
Utilities operate under the same dynamics. After all, you don’t need dozens of redundant electricity transmission lines overlapping a single city.
Without regulation, Fortis would be able to exert monopolistic pricing onto its customers. That’s a problem given that utilities deliver basic necessities. Governments control this power by setting a cap on how much Fortis can charge. In return, municipalities often guarantee the company a minimum rate base and pricing. Upside is capped, but downside is commensurately limited.
Here’s a perfect example of how rate-regulated earnings insulate a utility from volatility. In August of 2007, just before the global economic downturn, Fortis stock traded at $25 per share. In August of 2010, just after the collapse, Fortis stock traded for $28 per share. That’s a 12% increase in value, not to mention the dividend payments that continued unabated.
If you want price stability and consistent income during a bear market, Fortis stock is a proven winner.
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Fool contributor Ryan Vanzo has no position in any stocks mentioned.