There aren’t all that many TSX stocks that can hold their own when the broad stock markets really start to nosedive. Undoubtedly, moments of panic and vicious bear market crashes can happen, and while they shouldn’t cause investors to stay sidelined and out of high-quality stocks, I do think that at times like this (when the market only seems to know how to move higher), a bit of caution can pay major dividends. Indeed, there’s a difference between playing a bit of defence and taking on too little risk, which would allow inflation to weigh heavily on your purchasing power and wealth-creation potential.
At the end of the day, defensive dividend stocks are a great option for investors who want to put in more work on the defensive side of a “barbell” portfolio (a portfolio that’s weighted toward risk-on growth names as well as the Steady Eddies that can hold up when chaos strikes the financial markets).
Of course, defensiveness and safety might be at the cost of potential returns, but that doesn’t always have to be the case, especially if you have a name that has what it takes to steadily grow earnings over prolonged periods of time.
In this piece, we’ll look at one boring performer that just dipped around 6% from its highs (a half of a correction, if you will) and might be worth a second look for those looking to play things just a bit safer as the red-hot TSX Index moves into the second half of the year ahead of any potential spikes in turbulence.
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Hydro One
Enter shares of utility firm Hydro One (TSX: H), which has been a solid gainer in the past five years, rising just north of 83%. With the recent dip in the books and a price-to-earnings (P/E) multiple of 24.8, which is still quite rich but not excessively so, I do think that shares of H are worth a look on the way down.
What sets the $33.8 billion utility further from the pack, in my view, is its monopolistic positioning over Ontario’s transmission line. Indeed, it has a stranglehold on that grid, and with intriguing growth outlets south of the border, I do view the firm as having the best of both worlds. It can raise the bar on its earnings growth while also benefiting from operating as a virtual monopoly in Ontario. Indeed, few firms have the magnitude of steady “growthiness” that Hydro One possesses.
Of course, the nice moat and solid risk/reward have resulted in a multiple that’s not all that cheap, especially compared to the peer group. For new investors looking to punch a ticket, it all comes down to whether one is willing to pay more for a premier, defensive dividend grower. Of course, it’d be ideal if shares were closer to 20 times trailing P/E.
But even at today’s premium, with the relatively muted 2.5% dividend yield, I’m not against buying, especially if you’re serious about battening the hatches. The 0.4 beta and predictable growth profile, in my view, make for one of the best ballasts a portfolio steering a steady ship could ask for.
