Many TSX stocks have been having a stellar year, despite all the economic and political noise facing Canada this year. At 30,409 points, the S&P/TSX Composite Index is up 23.5% this year. It is trading just below all-time highs.
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Cracks are forming for the stock market; it might be time to get more defensive
Yet, cracks are forming across global markets. Software and technology stocks have been in a steep drawdown on fears about artificial intelligence (AI) threats. Transport stocks are in the doldrums due to tariffs and a freight recession. Insurance stocks are dropping on fears of a hard market. Bitcoin has collapsed by 10% in the past month.
With valuations still high compared to historical averages, the broader stock market could be due for a correction. Certainly, nobody knows when this could take place, but it won’t hurt to start positioning your portfolio a little more defensively.
Utilities, real estate, infrastructure, essential goods and services stocks are all safe places to invest when the economy and the stock market look weak.
A leading Canadian utility stock
Fortis (TSX: FTS) is by no means a growth stock. However, if you want stable returns, it’s a great place to look. Fortis operates one of Canada’s largest and arguably best utilities. Its focus on transmission and distribution assets that are almost entirely regulated helps ensure a stable and predictable stream of earnings.
Fortis has a low-risk $28 billion investment plan for the coming five years. While it’s a ton of cash to outlay, Fortis has a great balance sheet and an A- credit rating. Management expects to grow its rate base by a 7% compounded annual growth rate (CAGR), which is up from 6.5% in its previous capital plans.
That should translate into a similar rate of earnings-per-share growth to 2030. Fortis has 52 years of consecutive dividend growth in its pocket.
It targets 4-6% annual dividend growth over the coming five years. When you combine its 3.5% yield and history of 5-7% average annual returns, it’s not a bad total return profile for risk-averse investors.
A solid retail REIT
First Capital Real Estate Investment Trust (TSX: FCR.UN) is one of Canada’s largest grocery-anchored property owners. It focuses on urban locations with high population density. These are places where shoppers come for all their essential goods and services (groceries, pharmacy, banking, discount goods, and home supplies).
First Capital has had a strong year. Occupancy is up over 97% and strong leasing momentum has supported mid-single-digit rental rate growth.
The REIT pays a nice 4.6% distribution yield that is paid out monthly. Solid cash flow growth could lead to dividend increases in the years ahead. It is also nice to know that this stock trades at a discount to its private market value, so there could be upside in the stock price ahead.
Canada’s leading grocer and pharmacy
One of First Capital’s bigger tenants is Loblaw (TSX: L). With a market cap of $69 billion, Loblaw operates some of Canada’s largest grocery and pharmacy chains. It has grocery options for all parts of the economic spectrum (premium to value). Consequently, it can do well in almost any economic cycle. It just delivered solid third-quarter results due to outperformance from its discount brands.
Given the company’s scale, it can negotiate better pricing for customers. Likewise, its strong loyalty programs keep customers engaged and active.
Due to inflation and smart pricing strategies, Loblaw is likely to deliver mid-single-digit earnings-per-share growth for many years to come. Its valuation has risen in the past few years, but much of that is supported by its quality brand and franchise.
