Where to Invest As TSX Stocks Linger Around All-Time Highs

While TSX stocks look well placed for further upside, rising inflation poses a serious threat to overvalued assets.

Vineet Kulkarni

Vineet Kulkarni joined The Motley Fool Canada in January 2020 and covers multiple sectors and geographies. While North American oil and gas industry is one of his core interests, he often writes about utilities, tech and telecom. Vineet aims to help investors make informed decisions with his fundamenal analysis and insightful research. Apart from being a value investor himself, he is a proud father and a happy husband.

Published May 25, 2021 9:02 am EDT

TSX stocks at large have been making new highs for the last few months. While stocks look well placed for further upside, rising inflation poses a serious threat to overvalued assets. Here are three defensive Canadian names that offer decent dividends and growth potential for the long term.

Intact Financial

Intact Financial (TSX: IFC), the country’s property and casualty insurance leader, has emerged strongly from the pandemic. The stock has returned almost 70% since the crash last year. Interestingly, although the stock is trading close to its all-time highs, its discounted valuation indicates more room to run.

Intact Financial is a $21 billion company with over 17% share in Canada’s property and casualty insurance market. It has been consistent on the revenues and earnings front for years — a rare feat given the volatile nature of the insurance industry.

The company pays consistently growing dividends and yields 2% at the moment. While the yield is not significantly higher, it has raised shareholder payouts every year since 2005.

Intact Financial’s stable dividends, discounted valuation, and dominant market share could unlock significant shareholder value in the next few years.

Enbridge

Top mid-stream energy stock Enbridge (TSX: ENB)(NYSE: ENB) yields 7.2% at writing. The superior yield suggests a huge spread against broader markets’ average and treasury yields. Even if central banks raise interest rates in the short term, Enbridge’s yield will remain one of the brightest spots among broader equities.

Enbridge offers a comparatively better risk-reward proposition to investors relative to other energy companies. Unlike oil and gas producers, Enbridge operates energy pipelines that connect oil producers and refiners. It operates on long-term fixed-fee contracts, which facilitates earnings visibility. ENB stock has returned almost 32% in the last six months, including dividends.

That’s why ENB has managed to increase its dividends for the last 26 straight years. Notably, it intends to raise dividends by around 6% per year for the next few years.

Regularly growing dividends and decent capital gain prospects render ENB stock an attractive bet for conservative investors.

Fortis

Top utility stock Fortis (TSX: FTS)(NYSE: FTS) is another safe bet for income-seeking investors. It pays a stable dividend yield of 3.6%, in line with TSX stocks at large. NotaFortis has increased dividends for the last 47 consecutive years, which indicates stability and reliability.

Stocks like Fortis might underperform in the short term. But they are classic defensive stocks because of their stable dividends and slow stock movements. Also, they have a low correlation with broader markets, which makes them attractive in volatile times. Fortis stock has notably beat the TSX Composite Index in the last decades, including dividends.

Fortis aims to increase its dividends by around 5% per year for the next few years. Its low-risk operations and stable earnings will likely continue to drive the shareholder payouts.

Bottom line

These three TSX stocks offer a safer investment proposition to investors. Even if markets turn weak in the short term amid the uneven economic recovery, these three will likely remain relatively strong.