Market volatility is something that cannot be avoided entirely. That’s where investors can minimize the effect of volatility by building a defensive portfolio.
Defensive stocks operate in sectors of the economy that remain necessary even when growth in other areas of the economy weakens. As a result, the underlying business continues producing revenue and cash flow.
Even the most defensive portfolio isn’t immune to fluctuations in the market. They are, however, less likely to be impacted by market swings thanks to their essential nature.
In fact, defensive stocks often continue to raise dividends and see growth over time, even during downturns. This makes them ideal investments. Fortunately, there are several great Canadian defensive stocks that investors can add to a portfolio.
Here’s a look at three standout TSX stocks for any diversified portfolio.
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Emera brings regulated utility stability
Emera (TSX:EMA) is a regulated utility stock, offering electricity and natural gas service. This gives the company a defensive moat that persists across almost any economic environment.
The bulk of Emera’s business operates under regulated terms that help provide a stable and predictable revenue stream. This means that the company generates a stable and predictable revenue stream that allows Emera to invest in its utility infrastructure and pay a handsome dividend.
Those investments are supported by a $20 billion capital plan focused on grid modernization, reliability, renewable integration, and customer growth.
As of the time of writing, Emera’s dividend offers a yield of 3.9%. The utility has also provided annual increases to that dividend going back nearly two decades without fail.
The combination of essential demand, regulated revenue, and a growing dividend makes Emera a great addition to any defensive portfolio.
Canadian National Railway owns essential infrastructure
Canadian National Railway (TSX:CNR) is the second stock for investors looking to build a defensive portfolio.
Railways are some of the most defensive options on the market, and Canadian National operates one of the largest rail networks in North America.
That three-coast network moves goods between warehouses, factories, ports, and major markets across the continent. Those goods can be anything from automotive parts, chemicals and finished goods to crude oil, raw materials, and wheat.
Each year, the railway transports over $250 billion worth of goods across its network. It’s also highly defensive. That infrastructure would be extremely expensive and difficult for a competitor to reproduce.
In terms of income, Canadian National offers a yield of 2.1%. That’s not the highest yield, but it’s stable, well-covered, and growing.
In fact, that growth is one of its major appeals. Canadian National has provided annual increases to that dividend for three consecutive decades without fail.
That growth, along with stable earnings and the railway’s history of share buybacks, makes Canadian National a great option for any defensive portfolio.
Metro offers dependable consumer demand
Wrapping up the three stocks for a defensive portfolio is Metro (TSX:MRU). Metro is one of the larger grocers in Canada, with a network of stores across several banners serving customers in Quebec and Ontario.
The company also operates a large pharmacy network that overlaps with its grocery store business.
When budgets tighten during a slowdown, people still need to buy groceries, medications and basic staples. That recurring demand translates into a string of steady sales that extends across different economic conditions.
Another key point to note is Metro’s private-label business. During tougher economic periods, customers trade down to products that are more aggressively priced. This gives the company yet another defensive advantage when budgets are strained.
Metro offers investors a quarterly dividend with a yield of 1.7%. But like Canadian National, Metro’s appeal in this defensive portfolio lies with its dividend growth. The company has provided investors with annual upticks going back over three decades without fail.
Why these TSX stocks work better together
A defensive portfolio is both diversified and built to withstand market swings.
That’s where the three stocks mentioned above do their best. Emera provides regulated utility exposure, Canadian National adds essential infrastructure, and Metro contributes essential grocery and pharmacy demand.
While no stock is without risk, together these three provide a defensive moat, growth prospects and growing income potential.
In my opinion, one or all should be core positions in any well-diversified, defensive portfolio.
