2022 has been off to a rough start. The combination of a tech stock sector crash, high inflation, global geopolitical crisis, and multiple interest rate hikes have amplified the uncertainty in the stock market, causing high volatility.
Investors looking for safety and modest growth in a potential bear market should turn to the utilities sector. As a traditionally defensive play, utility stocks have two useful attributes we want: a low beta and low correlation.
To put it simply, the former refers to how much the stock moves relative to the overall market. The latter refers to how likely it is for the stock to move when the market does. We want scores for both to be low, as to insulate our stock from market movements.
Fortis
My first pick here is Fortis (TSX:FTS)(NYSE:FTS), a Canadian-based international diversified electric utility holding company. FTS has a very low beta of 0.10 right now, making it very stable. More important, it also has an extremely low correlation with the U.S. stock market at just 0.05%.
What this means is that an investor holding FTS would do extremely well in choppy market conditions, with their stock chugging along mostly unaffected by the noise. Fortis further backs this up with a set of excellent fundamentals, with solid operating and profit margins, return on equity, operating cash flow, and cash reserves.
You might think that because FTS is so non-volatile, it won’t have potential for high growth. The opposite is actually true, but only if you reinvest the dividends. With dividends reinvested, FTS has beat the market since 2000. This is due to its 48-year streak of quarterly dividend increases. Today, the dividend yield sits at a decent 3.50%.
Canadian Utilities
Despite how great Fortis is, investors should never keep all their eggs in the same basket. In this respect, buying another utility stock with similar characteristics is a good way to hedge your bets. The best candidate for the role here would be Canadian Utilities (TSX:CU)(NYSE:CU).
Like FTS, CU also has a low beta of 0.56. This is higher than FTS, and can be interpreted as CU being slightly more than half as volatile as the overall market. Currently, CU’s monthly correlation with the US stock market stands at 0.13, which, despite being higher than FTS, is still low enough for our purposes.
CU is also another Dividend Aristocrat, with many years of consecutive uninterrupted dividend increases and payments. The current dividend yield is 4.89%, with the five-year average yield at 4.59%. This is higher than Fortis, so investors seeking more income potential for a little extra volatility should definitely add CU.
The Foolish takeaway
Defensive investing means picking stocks with low correlation to the U.S. market and a low beta. Ideally, these stocks should also be profitable and well managed, with a good history of dividend yield and increases. The TSX utilities sector and, in particular, FTS and CU fit this description well.
