Investors are increasingly concerned that the Canadian economy could be headed for a recession in the next 12-18 months. This has already had an impact on the stock market and another correction can’t be ruled out. As such, it makes sense to consider holding top TSX dividend-growth stocks in this environment.
Economic outlook
High inflation is forcing the Bank of Canada and the U.S. Federal Reserve to raise interest rates. The goal is to slow down the economy and bring some balance to the hot jobs market. Economists say there is always a delay between the time the rate hikes are implemented and when the full effects show up in the economy. Analysts are concerned that the size and speed of the rate increases will eventually trigger a deep recession.
Ideally, the central banks will navigate a soft landing as inflation comes back down to their 2% target. Consumer spending remains solid, despite the big jump in debt costs and persistent inflation. This is keeping unemployment near record lows. In the current scenario, many economists predict the economy will go through a mild and brief recession.
A deep economic decline, however, can’t be ruled out, especially if interest rates remain high for longer than expected. Businesses and households are getting hit with huge increases in borrowing costs. Variable-rate loan payments jump immediately when rates rise. Fixed-rate borrowers are protected until their loans are due for renewal, so they have more time. Most fixed-rate mortgages in Canada are on terms of up to five years.
Savings levels soared during the pandemic. This is helping borrowers cope with higher rates, but businesses and families will eventually burn through the safety net if interest rates stay too high for too long. At some point, consumers will stop spending on discretionary items. That would lead to job cuts, which would potentially trigger a wave of loan defaults.
In the worst-case scenario, the domino effect would lead to a deep recession until rates drop again to stimulate a recovery.
How it will all unfold in the next couple of years is anyone’s guess, but it makes sense to take a defensive approach right now when buying stocks for a retirement portfolio.
Fortis
Fortis (TSX:FTS) raised its dividend in each of the past 49 years. Management intends to boost the payout by at least 4% annually through 2027, supported by the current $22.3 billion capital program.
Fortis is a utility company with $65 billion in assets located across Canada, the United States, and the Caribbean. Nearly all of the revenue comes from rate-regulated businesses, including power-generation facilities, electricity transmission networks, and natural gas distribution operations. That means cash flow is normally predictable and reliable.
Fortis stock trades near $56.50 at the time of writing compared to more than $64 at the 2022 highs.
Investors who buy at the current level can get a 4% dividend yield and wait for the distribution increases in the coming years to boost the return on the initial investment.
Enbridge
Enbridge (TSX:ENB) owns natural gas distribution utilities, renewable energy assets, natural gas transmission networks, and oil pipelines. The company is also expanding its export operations with the 2021 purchase of an oil export terminal in Texas and the agreement last year to take a 30% stake in a new liquified natural gas (LNG) facility being built in British Columbia.
Enbridge generated solid results over the past 12 months and is targeting adjusted earnings-per-share (EPS) growth of at least 4% through 2025. Distributable cash flow (DCF) is expected to increase by 3% over that timeframe, supported by the $17 billion capital program.
Enbridge raised the dividend in each of the past 28 years. Investors should see modest and steady dividend growth continue over the medium term.
Enbridge stock trades below $49.50 per share at the time of writing compared to more than $59 last June. The dip appears overdone, and investors can now get a 7.2% dividend yield.
The bottom line on top stocks to own in a recession
Fortis and Enbridge pay attractive dividends that should continue to grow, even through a recession. The stock prices could see additional downside in a market correction, but the distributions pay you well to ride out some turbulence, and there shouldn’t be any risk of a payout cut.
