With an unusual amount of uncertainty in the markets, spreading risk is the order of the day. Today, we’ll look at some of the simple ways that TSX investors can reduce some of the risk in their dividend portfolios along with a shining example of a stock to buy and hold throughout a depressed market.
Five simple ways to beat a recession
There are at least five sturdy, tried-and-tested ways to “recession-proof” a stock portfolio ahead of a correction: diversify, stabilize, streamline, analyze, and relax.
Diversification is fairly straightforward and simply means, don’t put all your eggs in one basket. Stability comes from buying stocks in low-risk sectors. Streamlining requires stripping out risk, while analyzing takes into account one’s financial horizons.
Relaxing is probably the hardest part, but it simply requires an investor to keep a level head and not sell at the first sign of trouble. After all, if a portfolio is built around low-risk assets with some growth and stable dividends, then an investor should stick by those informed decisions and have faith that such assets will right themselves in time and that the market will come back around.
To touch on financial horizons again briefly, this refers in part to the timescale that an investor is working with. Bluntly put, a younger investor will have a fairly wide financial horizon, can buy stocks for longer-term capital appreciation, and can afford to settle for slightly lower yields from slightly riskier assets. An older investor might want to go for fewer shares, more thinly spread across lower-risk, higher-yielding assets.
One stock fits all
A good example of a stock that fits all of the above checkpoints would be something like Fortis (TSX:FTS)(NYSE:FTS). Its mix of stability, passive income, and classically defensive area of business makes it a solid all-rounder. Paying a solid 3.5% dividend yield with a 10-year growth rate of 5.6%, Fortis is a the exemplary “defensive stock.”
What is it about this star stock that makes it a buy for low-risk, long-term investors? The company’s website sums up its secret ingredient: “We are primarily an energy delivery company focused on being a strong energy partner for our communities.”
Indeed, it’s this community-driven focus and ongoing reinvestment strategy that explain Fortis’s longstanding penetration of the market.
There is also a historical precedent for the stoically defensive nature of Fortis’s dividends. The electric utilities company saw a market-defying performance in the last big financial crisis of 2008/2009, pulling in a 17% hike in income at a time when most investors were watching their portfolios get torn to shreds. And those dividends weren’t static during that time either, as Fortis didn’t break its 45-year stride.
The bottom line
Besides utilities, other classic all-round sectors include financials (think the Big Five), telcos, and REITs. With a potential downturn menacing the markets, Canadian investors would do well to diversify their portfolios with stocks in these sectors, with Fortis being a prime example of what to look for when choosing “recession-proof” companies.
