The 2021 bear market is upon us. Just ask the growing number of experts who see tough times ahead.
“Veteran managers warn over exuberance as stock valuations and other signals flash red,” reports the Financial Times.
Jeremy Grantham predicts “a collapse rivaling the 1929 crash or the dot-com bust of 2000, when the NASDAQ Composite Index plunged almost 80% in 31 months.”
Seth Klarman compared investors to frogs in boiling water, warning that they’re “being conditioned not to recognize the danger.”
The upcoming bear market can ruin your portfolio, but don’t think the answer is to move to cash. The two stocks below can protect your downside and make sure your capital keeps growing, no matter where the market moves.
This stock is super reliable
Canadian Utilities (TSX:CU) has one of the most coveted Canadian records: the most consecutive years of annual dividend increases. That record currently stands at 49 years.
Imagine how reliable a business must be to achieve this. Over the past 49 years, Canadian Utilities has weathered multiple bear markets, some the harshest in history. Yet even in these times of turmoil, the business was able to increase the amount of money paid to shareholders. That’s incredible.
Reliability is built directly in the company’s business model. As a rate-regulated utility, most of its earnings have high cash flow visibility as prices are often determined years in advance, meaning that bear markets have little impact on financial results. Plus, volumes don’t shift very much during downturns, as electricity and natural gas demand are relatively constant.
There are downsides to investing in recession-proof stocks. Over the last five years, Canadian Utilities has lagged the overall market. Importantly, however, shareholder returns were still positive, fueled by the 5.5% dividend. If the market tanks by 50%, you’ll be ecstatic to earn positive returns of any kind.
The best bear market stock
Hydro One (TSX:H) is another rate-regulated utility stock with reliability built directly into its business model. Nearly 100% of its earnings are protected by price guarantees set by regulators. And like Canadian Utilities, demand is relatively stable, forming a powerhouse of financial reliability.
“In many ways, Hydro One has a monopoly over its market,” I explained last year, pointing out that the company’s transmission lines cover 98% of the Ontario province. “That’s why its prices are regulated,” I added, “but they’re still high enough to support a 3.5% dividend, plus 5% annual rate base growth.”
As with Canadian Utilities, this stock won’t blow you away during a bull market. But when the 2021 bear market hits, you’ll look like the smartest investor in the market by owning Hydro One. I expect its financial results to barely budge during a crisis, even during an economic nightmare. That’s the power of rate-regulated utility stocks.
How to invest right now
During huge market upswings, it can be sickening to be on the sidelines. That’s why moving to cash is an ill-advised maneuver. Your best bet is to stay invested, minimizing your downside using stocks like Canadian Utilities and Hydro One.
Don’t wait — the time to prepare is now.
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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.
Ryan Vanzo has no position in any stocks mentioned.