One of the many benefits of owning Canadian stocks, or more specifically, dividend-paying stocks, is that they can provide income that grows over time. As long as prices remain stable and those dividends get reinvested, investors can focus on growing that nest egg.
Unfortunately, inflation can quickly change that plan. Consumers feel it through groceries, gas, and utilities, while businesses feel it through input costs, financing costs, wages, and transportation.
And right now, inflation is staging a comeback, so investors need to be aware of it and consider how to offset that effect.
Source: Getty Images
Why inflation changes the investing conversation
Hearing that inflation is making a comeback is frustrating, but it’s not a reason to panic-sell or overhaul your portfolio.
All it means for investors is that steady, essential-service businesses that offer defensive appeal should be prioritized.
That necessity is key. Defensive businesses like grocers and utilities are not entirely immune to inflation, but their products and services remain necessary. People still need food. They still need medicine. They still need power, heat, and basic infrastructure.
That is why defensive Canadian stocks can play an important role when inflation comes back into focus.
Here’s a look at two defensive options for investors to consider now that inflation is on the rise.
Metro is built around everyday spending
Metro (TSX:MRU) is one of Canada’s larger grocery and pharmacy operators. The company operates grocery and pharmacy locations across Quebec and Ontario.
Metro’s business is built around everyday consumer needs, which gives it defensive appeal during times of heightened inflation.
When prices rise, households change how they shop. They may look for discounts or buy more private-label products, but food remains a basic household expense.
That fact alone makes Metro one of the worthwhile Canadian stocks to consider. Recurring demand across both grocery and pharmacy segments gives it exposure to a defensive segment that consumers need even when budgets are squeezed.
Another advantage that Metro offers investors is its dividend. As of the time of writing, Metro offers investors a quarterly dividend yielding 1.8%. That’s not the highest yield on the market, but it comes with a defensive moat and a growing payout.
In fact, Metro has increased that dividend annually for nearly three decades without fail. This makes it one of the appealing Canadian stocks to own, even when inflation makes a comeback.
Fortis offers utility income when costs rise
Another option for investors looking to offset the effect of inflation is to consider Fortis (TSX:FTS). Fortis is one of the largest utility stocks in North America, with multiple operating regions covering parts of Canada, the U.S. and the Caribbean.
Utility stocks like Fortis make great holdings because of the sheer simplicity of their business model. Fortis’ utility assets provide electricity and gas service to millions of customers across the markets it serves.
That service is backed by long-term, regulated contracts spanning decades.
Demand for electricity and heat remains consistent throughout different market cycles. Consumers need power to keep lights and heat on in their homes. That’s not exactly something that consumers can cut back on, like discretionary spending.
This gives utility stocks like Fortis one of the largest defensive moats on the market. It also means that Fortis generates a predictable revenue stream, which allows the company to invest in growth and pay a quarterly dividend.
As of the time of writing, that dividend carries a yield of 3.2%. And like Metro, Fortis has a long dividend-growth record.
In fact, Fortis has the second-longest annual increase streak in Canada, currently at over 50 years. This makes the company one of just two dividend Kings in Canada.
This solidifies Fortis as one of the best Canadian stocks to buy for the long term, irrespective of how inflation fares.
Buy these Canadian stocks to offset inflation
Metro and Fortis are not perfect inflation hedges. No stock is. But they both provide a necessary service with sizable defensive moats.
In my opinion, one or both of these stocks should be core holdings in any well-diversified portfolio.
