Investors shouldn’t expect the market waters to get any less choppy going into year’s end. The rate-driven pullback has punished unprofitable and expensive growth stocks the most — a trend that could continue going into the fall season. Indeed, September is historically one of the worst (if not the worst) months for the tech-heavy Nasdaq 100 exchange. In market sell-offs, the risk on trades is higher when stocks charge lower (a lot of the time the crowd is following tech stocks to heady peaks before the sell off), and sending shockwaves rippling through other sectors.
Though it’s likely too late to rush to the exits or rotate into more defensive securities (defensives have become a tad more expensive in recent months), I do think it’s wise to err on the side of caution, rather than reaching out to the falling knives that may still be months away from bottoming out. If recent rate hikes can’t tame inflation and corporate earnings begin to skid, things could easily become even choppier. True, the current bear market is milder than historical ones, but investors should not expect that things will only get worse.
Fast-falling inflation could help give a lift to the broader markets and put an end to this vicious bear market. In the meantime, investors should consider the low-cost safety stocks that are still trading at modest multiples.
At writing, Pet Valu Holdings (TSX: PET) and Canadian Tire (TSX: CTC.A) stand out as terrific dividend growth stocks that investors should not fear averaging into on weakness.
Pet Valu Holdings
Pet Valu Holdings is a relative TSX newcomer that grants Canadians a quick-and-easy way to bet on the “humanization of pets” trend. As we enter the early innings of a recession, we may discover that this trend is far more resilient in the face of economic pain than we thought.
Undoubtedly, Canadians love their pets, and they’d be willing to walk to great lengths to keep them happy, with top-of-the-line food, toys, and grooming services. Some pet owners treat their fuzzy friends as members of the family. Even if the budget becomes tight, many still find it justifiable to continue spending considerable sums on pet treats and toys.
Pet Valu isn’t just a way to play a strong investment trend; it’s a well-run company that’s doing a lot of things right. The company commands an impressive 16.6% return on assets, well above the 9.5% of the specialty retail industry average.
The 0.7%-yielding dividend may not seem like much, but I do think it’s subject to recession-resilient growth over the long haul. In terms of stability, it’s tough to top Pet Valu.
Canadian Tire
Canadian Tire is a big-box retailer that’s had to pivot over the years, with its Triangle loyalty reward program initiatives and e-commerce push. Such efforts paid off during the coronavirus lockdown period. Now, with a recession in sight, the stock is back on the retreat. I think the recent 24% dip in the stock is a tad overblown. Though discretionary retailers will feel the brunt of the recession as sales erode, Canadian Tire has what it takes to shrug off yet another roadbump in its 100-year-long history.
Over the long haul, Canadian Tire is on the right track, with its own exclusive brands and brand partnerships (Party City and Petco) to keep Canadian shoppers coming back. With the dividend yield now above 4% (close to the highest it’s been outside of crisis situations), I’d argue this dividend stud has a lot to offer to a TFSA investment fund on this dip.
