2 Stocks to Invest in a Sideways Economy

Low-volatility dividend stocks from Canada’s utility sector can be great picks for stagnant times.

| More on:
data analyze research

Image source: Getty Images

Are you worried about the prospects of a Canadian recession — or worse, stagflation? Are you concerned about your flashy growth and tech stocks suffering an agonizing demise in the face of a sideways-trading, range-bound market?

Well, I have the solution for you: low-volatility, dividend-paying stocks — two from Canada’s utilities sector, which houses the vital companies that power our homes, supply our water, and keep us connected.

Even when the economic indicators flatline, and the market seems to be stuck in a loop, these companies have a remarkable habit of maintaining steady operations, thanks largely to the essential nature of the services they provide.

This stability often translates into predictable, lower-risk returns for investors in the form of dividends. These regular payouts can provide an attractive income stream — a feature that becomes especially valuable when share price appreciation is absent.

What we’re looking for

Our search for the ideal two stocks focuses on two main metrics: beta and forward annual dividend yield.

First up is beta. Simply put, beta is a measure of a stock’s historical volatility in relation to the overall market. It’s like a yardstick for comparing a stock’s ups and downs to those of the market as a whole.

The market is assigned a beta of one. If a stock has a beta of one, it means the stock’s price has historically and is expected to move with the market. If the market goes up by 5%, the stock should also go up by around 5%, and vice versa.

Now, a stock with a beta less than one is considered to have low volatility. This means it’s less likely to experience big price swings and is generally less risky than the overall market.

If a stock has a beta of 0.5, it’s theoretically 50% less volatile than the market. So, if the market goes up by 10%, the stock should only go up by around 5%. Conversely, if the market drops by 10%, the stock should only drop by around 5%.

Next, we want to screen for stocks with a forward annual dividend yield of 3% or greater, while maintaining a payout ratio lower than 80%.

Basically, we’re looking for a stock that will provide an annual income of at least 3% based on its current price. The term “forward” means that it’s based on future projections via the most recent dividend, rather than historical yields.

Finally, a payout ratio lower than 80% suggests screens for companies that retain at least some portion of their earnings for reinvestment or to cover future challenges to ensure financial health.

Potential candidates

Based on the above criteria, I found two Canadian utility sector stocks that currently have a five-year monthly beta of lower than 0.5, have a projected forward annual dividend yield of 3% or higher, and have a payout ratio under 80%.

  1. Hydro One: 0.25 beta; 3.05% forward annual dividend yield; 65.7% payout ratio.
  2. Fortis: 0.17 beta; 3.90% forward annual dividend yield; 74.83% payout ratio.

Which one is better? Honestly, I would buy both for greater diversification and then supplement each with some additional Canadian dividend stock picks from other sectors (and the Fool has some excellent suggestions below!)

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

More on Investing

think thought consider
Tech Stocks

Is CGI Stock a Buy Even With No Dividend Yield?

CGI stock may not have a dividend to speak of. But does that necessarily mean you should ignore this top…

Read more »

A robotic hand interacting with a visual AI touchscreen display.
Tech Stocks

Why Now Is the Time to Invest in Canadian AI Stocks

Are you looking for one of the most solid Canadian AI stocks out there? This one is probably your best…

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

Why AI Stocks Should Be in Every Canadian Investor’s Portfolio

AI stocks continue to be one of the best options out there for long-term investing, especially when considering Canadian options.

Read more »

stock research, analyze data
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

There are opportunities and risks on the horizon for the Canadian banks.

Read more »

Young Boy with Jet Pack Dreams of Flying
Stock Market

Is Air Canada Stock a Good Buy After Its Q3 Results

Down almost 60% from all-time highs, Air Canada is an undervalued TSX stock that remains an enticing investment in November…

Read more »

cloud computing
Investing

Where to Invest $10,000 in November

Given their solid underlying businesses and healthy growth prospects, I expect these two defensive stocks to outperform uncertain outlook.

Read more »

coins jump into piggy bank
Retirement

Here’s the Average RRSP Balance at Age 44 for Canadians

Holding stocks like Alimentation Couche-Tard (TSX:ATD) in an RRSP is a good way to build your wealth.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »