2 Stocks to Invest in a Sideways Economy

Two defensive TSX stocks are ideal prospects for risk-averse investors looking to invest, despite a sideways economy.

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Canada’s inflation rate is down to 4.3% in March 2023, and the stock market posted gains in each of the last eight trading days. However, there are no clear trends for investors, as the Bank of Canada remains open to resuming its rate-hike cycle if the economy doesn’t cool as expected.

BMO chief economist Douglas Porter said all roads point to a 3% inflation in the months ahead but warns that interest rates could stay high longer. Moreover, Porter doesn’t see relief from high prices anytime soon.

If you have an investment appetite today, two stocks are ideal prospects in a sideways economy. Hydro One (TSX:H) and North West Company (TSX:NWC) continue to defy the headwinds. Both stocks display resiliency, as shown by their 10.89% and 10.56% positive returns thus far this year.

Predictable growth profile

Hydro One is one of North America’s largest electrical utilities and Ontario’s largest electricity transmission and distribution service provider. The $23.89 billion large-scale regulated electric utility company has no generation or material exposure to commodity prices — a competitive advantage.  

Since the business is fully rate regulated and operates in a collaborative regulatory environment, cash flows are stable and growing. Furthermore, Hydro One’s multi-year approved capital-investment program supports consistent rate base growth (6% compound annual growth rate). The $2.1 billion in capital investments will expand the electricity grid and renew and modernize existing infrastructure.

In 2022, total revenues (distribution and transmission) and net income increased 7.7% and 8.7% year over year to $7.78 billion and $1.05 billion. The share price is $39.91, while the dividend yield is 2.81% if you invest in this large-cap stock today. As the rate base expands, there’s an opportunity or room for dividend growth.

Building momentum

North West Company outperforms the TSX (+6.71%) and the consumer staples sector (+5.30%). The $1.86 billion retailer of food, everyday products, and services has captured markets in underserved rural communities and urban neighbourhoods. It caters to customers in far-flung northern Canada, rural Alaska, the South Pacific, and the Caribbean.

Dan McConnell, NWC’s president and chief executive officer, said, “Coming out of two years of challenging pandemic circumstances and now experiencing high-cost inflation, our teams continue to work diligently to provide value to the communities and customers we serve.”  

In 2022, sales rose 4.6% to $2.35 billion versus 2021, while net earnings declined 20.1% year over year to $125.8 million. Nevertheless, McConnell was pleased with the results and expressed excitement about the momentum that NWC is building. He added, “Our journey ahead is promising, and I am optimistic about our future.”

According to McConnell, the team has uncovered additional potential in the core business. He is confident that NWC will continue delivering value for its customers and shareholders. More importantly, one of the world’s longest continuing retail enterprises is a reliable passive-income provider.

The consumer defensive stock trades at $38.95 per share and pays a decent 3.88% dividend (payout ratio is 59.76%). NWC’s annual dividends per share have increased by 3.7% (the compound annual growth rate) over the past 10 years.

Safe and defensive assets

Risk-averse investors need safe and defensive assets like Hydro One and North West Company if the economy is tentative or without a clear direction.

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.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends North West. The Motley Fool has a disclosure policy.

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