In light of the news that central banks in the U.S. and Canada might begin reducing key interest rates due to cooling inflation, equity markets began rapidly recovering in the last quarter of 2023. However, consumer market data in the U.S. showed that the situation is unlikely to improve as much as it was expected to.
While interest rates might fall this year, the pace will likely be slower than anticipated. The result has been a considerable degree of volatility in global equity markets.
As of this writing, the S&P/TSX Composite Index is up by 1.68% year to date. However, this came after a rapid surge of 3.10% in two days of trading, before which there was a sharp decline in the Canadian benchmark index. Between persistently high interest rates, global supply chain issues, and various other macroeconomic jitters in play, the market will likely remain volatile.
Some investors take their money out of the markets to protect it from the uncertainty. However, the TSX offers several defensive assets you can consider to strengthen your portfolio instead. Here are two of my top picks for stable stocks that can add a defensive aspect to your self-directed investment portfolio.
Dollarama
Dollarama (TSX:DOL) is a $28.65 billion market capitalization company headquartered in Mont Royal, operating the country’s largest dollar store retail chain that offers goods for five dollars or less. With over 1500 locations throughout Canada, Dollarama offers customers a wide range of products at more affordable prices.
Besides offering goods at lower prices, Dollarama is a cost-efficient business with a lean business model that prioritizes growth. Since it has a direct sourcing method, the company can afford to offer better prices, making it a more compelling choice for consumers.
The company is expanding its presence, with plans to increase its store count to 2,000 locations in the next seven years.
Since 2011, it has raised its dividends 12 times, grown its revenue at an 11.3% compound annual growth rate (CAGR), and its earnings per share at a 17.5% CAGR. As of this writing, Dollarama stock trades for $102.76 per share, up by 8.16% year to date, beating the broader market by a significant margin.
Canadian Utilities
Canadian Utilities (TSX:CU) does not offer growth like Dollarama stock but is a defensive business that has been a staple in many investor portfolios for decades.
The $6.19 billion market capitalization company is headquartered in Calgary and provides essential utility services to customers nationwide. It is primarily engaged in the transmission and distribution of natural gas and electricity. The critical nature of the services it provides means stable, recurring revenue.
While the stock of utility businesses is considered boring due to a lack of rapid capital gains, the same sideways movement makes them attractive when the rest of the market declines.
Canadian Utilities uses its stable and reliable cash flows to become a viable bond proxy for investors. It is one of the only two Canadian Dividend Aristocrats on the TSX, with a dividend-growth streak spanning over 52 years.
As of this writing, it trades for $30.31 per share and offers dividends at a juicy 5.98% dividend yield.
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Foolish takeaway
Dollarama stock is an excellent example of a business that can do well during volatile market conditions. As people cut discretionary expenses and look for more affordable alternatives for essentials, low-cost retailers like Dollarama see a surge in demand.
Even in the harshest economic conditions, people will never sacrifice utility services to save money. This factor makes Canadian Utilities another business that can generate healthy cash flows regardless of market conditions.
Suppose you are looking for investments to shore up your defences and sleep better at night during volatile market conditions. In that case, these two can provide a good combination of growth and stability through reliable cash flows and dividends to protect your investment capital.
