It’s time to think about volatility protection as we head into late summer. Indeed, the relative lack of volatility we’ve experienced through July may not last, especially if traders re-evaluate the names in their portfolios as the trade war looks to make its next big steps. With the U.S. Federal Reserve holding off on rate cuts despite Trump’s calls for lower interest rates, markets could go either way from here.
We’ve got some respectable earnings results from the largest and most influential American companies. That said, valuations are stretched, and it seems like that meme stock mania is heating up to levels not seen since the roaring year of 2021. As always, the future is impossible to predict as an investor.
All we can do is prepare our defences and be ready to execute a plan once volatility, investor panic, and negative headlines come rushing in. It’s going to happen. It’s just a matter of when.
Source: Getty Images
Volatility protection is important, especially as other investors get euphoric
Though volatility protection could come at the cost of upside potential if this market has more room to run (could the S&P target 7,000 by year’s end? Perhaps.), I think that those who’ve overextended on risk with the assumption that the minimal volatility we’ve run through of late will persist (it’s natural to assume the near-future will resemble the recent past) should look to some of the market’s more defensive plays while they’re on the cheap side.
The utility stocks, I think, offer a great defence from volatility alongside a solid dividend as well as capital gains potential.
Enter shares of Fortis (TSX: FTS) and Canadian Utilities (TSX: CU): two steady names that cautious investors should probably have positions in well before the market has another chance to slip into a correction. Both well-run dividend payers are far better than bonds, especially if you’re a younger investor looking for long-term capital and dividend appreciation!
Fortis
Fortis is a great utility play that may break out at the start of August. Indeed, with a few good quarters put together, I view the steady utility as a proven performer that’s perfect to stash away in a TFSA (Tax-Free Savings Account) before wandering into a seasonally treacherous period for stocks.
The 0.33 beta implies FTS shares are less likely to follow the TSX Index lower on those really bad days. With a predictable (dividend) growth rate in the 4-6% range and some very low-risk projects pursued under the hands of a stellar management team that knows how to execute, I’d be inclined to add to a position in the 3.66%-yielder at 20.4 times trailing price to earnings (P/E) before a breakout has a chance to happen.
In any case, get ready for earnings, which are due tomorrow, as they could be the biggest test for the stock in years.
Canadian Utilities
Canadian Utilities is a much smaller utility play with an $8.1 billion market cap. However, it has the larger yield (4.7% at writing) and a still very low beta of 0.58. While CU could be a choppier ride that’s somewhat pricier (27.1 times trailing P/E), I like the name’s dividend-growth profile and its chances of side-stepping the next market-wide pullback, which, if I had to guess, will be led by the high-flying names in the tech sector.
With 53 straight annual dividend hikes delivered, CU is a name you can just buy and hold for decades at a time without worry. It’s a defensive dividend growth stock to rely on whenever the going gets tough. And right now, the name looks ripe to buy as the markets get a tad overbought, pricey, and perhaps overdue for another seasonal descent.
