The selloff in the Canadian equity markets continued for the third consecutive trading day on Tuesday, with technology stocks taking significant hits. The S&P/TSX 60 Index, which had a spectacular run after bottoming out in March, has corrected 3.6% during these three days. Meanwhile, the sell-off could continue, given the uncertainty over the economic implications of the pandemic.
So, amid high uncertainty, it is wise to go defensive now. Here are the three low-risk stocks to not only protect your capital but that also earn dividends at an attractive yield.
My first defensive pick is an electric utility company, Fortis (TSX:FTS)(NYSE:FTS), which is up 0.2% in the last three days, despite the weakness in the broader equity markets. The company runs a rate-regulated electric utility business, with regulatory mechanisms protecting 63% of its top line. Additionally, the company earns 19% of its revenue from residential consumption. So, the economic downturn will not have a much impact on the company’s financials.
Further, the company’s liquidity position looks strong with cash and cash equivalents at $380 million and an unutilized credit facility of $4.8 billion at the end of its recently completed second quarter.
Meanwhile, the company’s management has reiterated its long-term outlook, despite the uncertain outlook. The company has planned to increase its rate base to $38.4 billion by 2024 at a CAGR of 6.4%. The growth in its rate base could support its future earnings and cash flows.
Fortis is a Dividend Aristocrat, which has increased its dividends for 46 consecutive years. Currently, the company’s forward dividend yield stands at 3.6%. Also, the company’s management expects to raise its dividends by 6% every year until 2024. Given its strong liquidity position, recession-proof business model, and impressive growth prospects, I believe Fortis’s dividends are safe.
My second pick is also an electric utility company. TransAlta Renewables (TSX:RNW) generates and transmits electricity primarily from renewable resources. The company’s business remains immune to an economic downturn, as the company sells the power generated from its assets through long-term PPA (power-purchase agreements). Thus, the company’s revenue streams are stable.
Amid the increased concerns over the pollution, the world is moving away from non-renewable resources and toward renewable resources. Being an early mover in the sector, TransAlta Renewables could benefit from this shift. Also, the company’s weighted average remaining contractual life of its PPA stands at 11 years. So, the company’s outlook looks stable.
Since going public in 2013, the company has increased its dividends at a CAGR of 4%. Meanwhile, the company pays dividends of $0.07833 every month, which translates to an annualized payout of $0.94 per share. So, the company’s forward dividend yield stands at 6%.
Given its strong liquidity position of $498 million and impressive growth prospects, TransAlta Renewables is an excellent buy amid the uncertain outlook.
In the era of telecommunication becoming an essential service, my third pick would be BCE (TSX:BCE)(NYSE:BCE). Despite the impact of the pandemic-infused lockdown, the company’s free cash flow increased by 49.7% to $1.61 billion in its second quarter. Also, at the end of the quarter, the company’s liquidity stood at $5.4 billion.
BCE’s impressive cash flows allow the company to invest in growth initiatives. In June, the company had launched its 5G network in five markets with plans for further expansion. Also, amid the shift towards working and learning from home, the need for BCE’s services could rise further. So, the company’s growth prospects look strong.
Since 2015, the company has increased its dividends at a CAGR of 6.4%. The company has announced quarterly dividends of $0.8325 for the third quarter. So, the company’s forward dividend yield stands at 5.9%. With the company trading over 6% lower for this year, it provides a good entry point for long-term investors.
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.
The Motley Fool recommends FORTIS INC. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.