After an incredible run-up in 2025, stocks may be due for a drawdown. Drawdowns are a natural part of markets. They tend to neutralize the market when things become too exuberant.
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Dividend stocks are a safe space for market downturns
Market declines are hardly ever fun, especially when you are fully invested. But, it is impossible to time the next drawdown. So, it is wise to stay mostly invested. That is especially true if you have a long investment horizon (five years or more). However, you can build insurance inside your portfolio.
Many dividend stocks are defensive in nature. They may not grow much, but they are able to provide stable income. When the market declines, you still collect a dividend. The best dividend stocks tend to regularly increase their dividend rate over time. Like ballast on a ship, it helps offset and balance out any volatility inside your portfolio.
If you want some defence in your portfolio for a potential drawdown, here are two stocks I’d buy now.
Fortis: The safest of safe dividend stocks
Fortis (TSX: FTS) has to be near the top of the list when it comes to defensive dividend stocks. You don’t own Fortis for big capital gains. Over the past five years, it has only risen 31% for a 5.5% compounded annual growth rate (CAGR).
However, when you add in its growing stream of dividends that return nearly doubles to 60% or a 9.7% CAGR. It’s a market return. Yet, Fortis only has a Beta of 0.35. Those returns came with much less volatility than the broader market.
With a market cap of $35 billion, Fortis is a major utility provider in Canada and the United States. It has a five-year plan to grow its rate base by 6.5% annually. If it successfully executes, that should easily translate into 4–6% earnings and dividend per share growth over that time horizon.
Fortis yields 3.4%. This stock has a record of increasing its dividend for 51 consecutive years. Chances are very good that this trajectory will continue for the years ahead.
First Capital REIT: Essential focus for tough times
First Capital REIT (TSX: FCR.UN) is another defensive dividend stock to hold for a market downturn. Its stock is up 47% in the past five years for an 8.1% CAGR. Throw in its distributions and First Capital is up 84% over five years for a 13% CAGR.
First Capital operates 21.9 million square feet of grocery-anchored retail properties across Canada. If the market declines because of a recession, this is a stock to hold.
Over 70% of its tenants provide essential services. Its top locations are supporting an impressive 97% occupancy and mid-single digit rent growth.
This dividend stock has a mix of development and land assets. It has steadily been selling these off to pay down debt and improve its balance sheet. The market barely recognizes the value of its excess assets, so it continues to trade at an attractive discount to its private market value.
First Capital stock yields 4.6% right now. With an improving balance sheet and a rising stream of cash flows, First Cap raised its distribution for the first time in recent history. It could be a sign of more distribution growth to come.
