The search for defensive stocks is on. In this macro backdrop, with inflation still high (but coming down) and interest rates (maybe?) set to decline, there’s plenty of uncertainty in the market. And as stocks are valued at levels that suggest the market may be topping out, there is reason for investors to be cautious.
Of course, many investors categorize defensive stocks differently. Do these companies refer to value stocks with low multiples? Or are they companies with defensive business models able to perform well in downturns? Or, perhaps we’re talking about growth at a reasonable price or companies providing stable dividend growth over time?
It can be all of the above. In the case of the three companies I’ve picked here, I think some of each element can be found in these three.
Let’s dive in.
Source: Getty Images
Fortis
Fortis (TSX:FTS), a leading regulated Canadian utility company, is among the companies I’ve been pounding the table on for some time. Given its core business model, which involves providing gas and electricity to more than 3.4 million customers, Fortis is about as defensive as stocks come. Unless its customer base doesn’t want their lights and heat turned off, they’ll pay their bills. That’s the sort of cash flow stability many investors are after right now.
Notably, Fortis has plans to expand its base rate, driving its dividend payouts and earnings. The company expects to increase its annual dividend yield from 4-6% during the same period. Recently, the company declared a dividend of $0.59 per equity share and a range of $0.24 to $0.41 per share for first preference shares of multiple series.
I believe Fortis remains undervalued relative to its cash flow and dividend growth profile. Currently trading at around 17.7 times earnings, there’s plenty of multiple expansion potential on the horizon. Indeed, if interest rates drop, that thesis becomes even stronger.
Dream Industrial REIT
Dream Industrial REIT (TSX:DIR.UN) is amongst the largest real estate investment trusts in Canada. It has a massive portfolio of 321 industrial assets spread across the United States and Europe, with over 70.6 million square feet of leasable space. It focuses on delivering robust total returns and secures cash flow to shareholders. The company declared a dividend of US$0.058 per share in October 2023, resulting in an annual payout of US$0.70.
In its third-quarter financial reports, the company experienced a notable 10.4% growth in net operating income and a substantial 17.4% increase in net rental income. Its recent strategic acquisition of assets and rising property values have driven Dream Industrial’s total assets to US$7.9 billion, which is remarkable.
Overall, companies need a place to house their goods and provide logistics out of. Dream’s industrial sites in prime locations spread across North America do just that. This is a stock to hold for the long term and buy on dips, in my view.
Toronto-Dominion Bank
Toronto-Dominion Bank (TSX:TD) is among the Top Five Canadian banks and provides a range of banking services, including wealth management, corporate and retail banking, and other financial services. It also offers products like certificates of deposit, credit cards, insurance, international banking, and investment advice. The bank operates not only in Canada but also in Europe, Asia-Pacific, and North America.
TD Bank serves individuals, businesses, and high-net-worth individuals through branches, ATMs, wealth advisors, and online platforms. Toronto-Dominion Bank has recently been recognized by the Business Intelligence Group for its efforts in offering user-friendly digital experiences and leading innovative initiatives.
The bank’s stock has been in the spotlight recently as it announced an increase in its dividend to $1.02, 6.3% more than it offered to investors last year. Toronto-Dominion Bank has a history of paying steady dividends supported by earnings growth. For those seeking stability and total returns, TD stock remains a great pick.
