When navigating volatile markets, investors often look for safe stocks – those that can weather market turbulence and provide reliable returns over time. But what exactly makes a stock “safe”? It’s a stock that minimizes the risk of capital loss while offering satisfying long-term returns. While no investment is completely immune to market fluctuations, there are ways to mitigate risk by considering stocks with resilient earnings and solid fundamentals.
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Key factors in identifying safe stocks
The primary goal when choosing a safe stock is to focus on earnings stability and take note of its valuation. A stock that offers predictable and growing earnings, along with reasonable valuations, is less likely to experience large drawdowns during periods of market volatility. This becomes especially important when markets are prone to swings, such as during economic downturns or interest rate hikes.
One way to further reduce risk is by choosing stocks that pay dividends. Dividends act as a buffer, offering a return on investment even when the stock price experiences turbulence. For example, consider investing $10,000 in a dividend stock with a stable yield of 5%. This would generate $500 annually, providing some downside protection. If the company increases its dividend over time, your “payback period” accelerates, making the stock even safer. Essentially, dividends help you recoup your investment while providing an income stream.
Valuation compression and how it affects stock safety
Valuation compression is a factor that can hurt stock prices. This occurs when a stock delivers lower-than-expected growth in its sales or earnings. For instance, tech stocks with sky-high price-to-earnings (P/E) or price-to-sales (P/S) ratios are especially vulnerable to valuation compression if their growth stalls or doesn’t meet investor expectations.
An example of valuation compression in action is Toronto-Dominion Bank (TSX:TD). Although TD is one of Canada’s largest and most well-established banks, its growth trajectory has been impacted by regulatory challenges in the United States. This has slowed TD’s growth and capped its U.S. expansion potential. As a result, TD stock is trading at a discount of about 13% from its long-term valuation, making it a potential attractive opportunity for long-term investors willing to hold through volatility.
At the current price of around $78 per share, TD offers a solid dividend yield of 5.4%. The combination of a discount to its historical valuation and its strong dividend yield makes it a relatively safe stock to buy and hold. For investors confident that TD’s growth will eventually return to normal, this stock offers an attractive risk-reward profile.
A solid REIT for stability: Granite REIT
Another safe Canadian stock to consider is Granite Real Estate Investment Trust (TSX:GRT.UN). This industrial REIT has been a reliable business, with a diversified portfolio of distribution and warehouse properties. Thanks to the 12% correction from its peak in late 2024 and recent cash distribution hike, Granite REIT offers a cash distribution yield of nearly 4.9%. This income adds an extra layer of safety for investors.
The e-commerce trend continues to fuel demand for industrial properties, and Granite REIT’s portfolio positions it well to benefit from this growth. At the recent quotation of around $70 per unit, Granite REIT is trading at a 17% discount from its long-term valuation, creating a buying opportunity for those who want to lock in both income and price gains potential.
Granite REIT’s solid yield and resilient business model make it a good choice for conservative investors looking for a steady income stream during market volatility.
The Foolish investor takeaway
Finding safe stocks can be challenging, but by focusing on companies with strong fundamentals, stable earnings, and reasonable valuations, you can build a portfolio that stands the test of time. Toronto-Dominion Bank and Granite REIT are two Canadian stocks that fit this bill. Both offer solid dividends and the potential for long-term capital appreciation – even during periods of market volatility.
Remember, while no investment is entirely risk-free, focusing on safe stocks with a history of stable earnings can help you weather the ups and downs of the market with greater peace of mind.
