Even the steadiest defensive dividend stock in the world is considered to be a risky asset. Undoubtedly, if you want something that’s truly safe, risk-free assets (think instruments like guaranteed investment certificates, or GICs) are the place to be. However, at these levels, the returns aren’t all too great, especially with GIC rates being at a relatively low point. If you want more reward, you will need to take on some risk.
But the good news is that you can get a whole lot more reward by taking on a bit of risk. Now, you don’t need to jump into the deep end with the plunging AI stocks that are in the process of giving back much of the multi-bagger gains to the market. Instead, it can be as simple as picking up a few shares of your favourite high-yield utility or a particular value stock that you believe trades at a market price that entails a decent margin of safety.
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Better risk/reward in the defensive dividend “bond proxies?”
Any way you look at it, there are ways to reposition for better “deals” if you’re open to taking on more risk. When it comes to investing, it can literally pay more dividends to look at the risk/reward balance, rather than shying away from all risk, especially if you’re a new and young investor who, unlike older investors nearing retirement, can afford to take risks. If you’ve got time on your side, you can stick around for the eventual recovery after a stock market crash, bear market, or annual market correction.
Of course, your ability to take risks depends on far more than your age. That’s why investors should consider the big picture. Either way, energy prices are skyrocketing, and inflation could be in for a huge second wind. In my view, the opportunity costs of holding cash or settling for subpar rates in a GIC are rising.
With the Bank of Canada likely to hold off on further rate cuts (in my very humble opinion, they should actually be hiking given how high food inflation is and the energy inflation to come). While higher-rate GICs may soon be on the way, I’d much prefer cheap defensive dividend payers at this juncture as they pay you to wait.
Hydro One
When it comes to safety, it’s hard to do better than shares of Hydro One (TSX: H) with its monopolistic market positioning and very steady cash flows. While the “bond proxy” is a great way for more cautious investors to get a nice, growing dividend along with a very low correlation to the broader stock market (0.40 beta right here), the name is getting a bit on the pricier side at nearly 27.0 times trailing price to earnings (P/E).
Of course, the steady grower and sound dividend (2.23% yield) still make Hydro One a fantastic long-term hold through difficult periods. That said, I think the heightened valuation and historically compressed dividend yield could limit upside.
And, of course, if there’s a rotation out of defensives, not even H stock is immune from a big dip. Perhaps a more hawkish pivot from the Bank of Canada could cause a slight correction. Either way, I’d be a cautious nibbler here, but would be more of a watcher at these prices. If shares were to come in, it’d be a great time to pounce.
Either way, H stock is a solid long-term defensive, but one that might be getting frothy.
