Top Recession-Resilient Stocks for Canadian Investors

It makes sense to increase exposure to recession-resilient names in the current environment.

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It has been a great start to 2023 so far. Markets have rallied on the hopes of easing inflation, which could bring a halt to rapid rate hikes. However, fears of a recession are increasing, and we might not necessarily see a soft landing. War in Ukraine, sluggish growth in major economies, and a tighter monetary policy have been some of the main causes driving the global economy toward a potential downturn.

However, there are some pockets in the market that could provide relative stability and protect your capital. For example, growth names during the pandemic crash in March 2020 cratered by a massive 40%, while defensives like utility stocks dropped only 10%. So, it’s prudent to have some exposure to such defensives, even if you are a growth investor.

Safe, dividend-paying TSX stocks

Consider a utility stock Canadian Utilities (TSX:CU). Its large regulated operations facilitate stable earnings and dividend growth. As a result, it has the longest dividend growth streak of over 50 years among the Canadian-listed companies. You might have to forgo growth expectations as it is a slow-moving, “widow-and-orphan” stock. However, when it comes to stability and dividends, CU has stood tall.

Another differentiating factor is their correlation with broader markets. If the broad market index tumbles, by say, 3%, utility stocks like CU might see a drop of only 1%. That’s because many market participants take shelter in these safe, dividend-paying names when broader equities turn rough.

CU stock has returned 7.5% in the last five years. That’s a decent return for conservative, income-seeking investors. However, note that it has underperformed in bull markets. So, when the objective is stability, CU is one of the top picks.

Stable earnings facilitate stable returns

Another stable dividend-paying name in Canadian markets is a top energy midstream stock, Enbridge (TSX:ENB). It operates some of the biggest energy pipeline networks in North America and earns stable cash flows even when oil prices are volatile. That’s because it acts as a toll business, and its revenues are derived from long-term contracts.

ENB stock is currently trading at a dividend yield of 6.6%, way higher than peer Canadian bigwigs. It has increased shareholder payouts for the last 28 consecutive years, indicating earnings stability and dividend reliability.

Telecom titan BCE (TSX:BCE) is another safe bet that offers superior yield. The telco currently yields a decent 6% and offers stable return prospects. BCE has grown its earnings steadily over the long term. Its large subscriber base and solid capital investments in the last few years will likely drive stable earnings growth for the next few years. This, in turn, can deliver consistent shareholder payout growth in the foreseeable future.

Key takeaway

Earnings quality is of utmost importance when you are investing for stability. Earnings of the above three companies have grown steadily in almost all economic cycles in the past, which makes them resilient in economic downturns. In comparison, some sectors like consumer or tech see a larger earnings decline in recessions and thus, their stock prices also see big drawdowns. So, it makes sense to increase exposure to recession-resilient names in the current environment.

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.

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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