TFSA investors shouldn’t look to overextend themselves just because their risk appetite has improved in recent weeks. Indeed, 2022 was a year of relentless selling across the board. 2023 has been more optimistic. Though bank failures in the U.S. exacerbated the fears of some, I still think TFSA investors should stay steady and resist the urge to pile into “what’s working” at any instance in time.
Technology stocks are finally shrugging off the rate-induced pressures caused by last year’s rate hikes. Though the fight against inflation is not yet over, the recent deceleration in inflation is encouraging. If anything, rate hikes, bank failures, tightening liquidity conditions, and the rise of AI could apply enough disinflationary force to bring us back to normalized inflation levels sooner rather than later.
Innovation investor Cathie Wood seems to think deflation risks are to be taken seriously. Amid inflation, any deflationary pressures are welcome. If Wood is right, though, the tides could turn back in favour of tech. Still, it’s important to remember that it takes time for actions to have a disinflationary impact. With that, inflation could continue to weigh for some time.
In the meantime, TFSA investors shouldn’t look to place a bet on where they think inflation is headed next. Instead, it’s wise to play both sides of the coin with securities that can help your portfolio fare well regardless of inflation’s next move. At this juncture, inflation data is moving markets. If it doesn’t back down as fast as markets expect, stocks may still be a choppy ride.
Fortis (TSX:FTS) and Hydro One (TSX:H) stand out as great investments to stash at the foundation of any TFSA. If deflation strikes, you may not get huge gains as you would with recovering tech stocks. However, if inflation sticks around for another year or two (or more), the following names seem better able to hold up versus the riskier tech basket.
Now, inflation is not good for any firm. But the following firms, I believe, could provide steady sailing as the economy slows down and rates stay elevated.
Fortis
Fortis may be a defensive utility with a secure operating cash flow stream around its wide-moat assets. And though it has been a less choppy ride (0.17 beta meaning less correlation to the market) over the years, shares have felt the pressure of rates and macro headwinds. Shares plunged 23% from 52-week highs to 52-week lows before recovering nearly half of the ground lost.
Looking back, the bear market plunge seems overdone. Though headwinds could still nibble away at profitability prospects, I still view the stock as a cheap way to navigate a hard environment. The stock sports a 3.93% dividend yield. That’s still higher than where it normally is. Further, 20.5 times trailing price-to-earnings isn’t all too high a price to pay for a high-quality defensive juggernaut with low-single-digit growth prospects.
Hydro One
Hydro One is another defensive play that’s been bid up in recent years. Like Fortis, shares have a low beta (0.25) and a nice dividend (2.91% yield). At 22 times trailing price-to-earnings, H stock is a tad pricier than Fortis. Further, shares are at a fresh high at $38 and change per share.
Even at these heights, I think the stability offered by the name makes it a worthy addition to any TFSA. Between Hydro One and Fortis, though, I have to go with Fortis. It has the bigger yield, the lower price-to-earnings multiple, and a lower beta.
