The general rule of thumb is to have three to six months worth of living expenses as your emergency fund. After building an emergency fund, you can consider putting capital you don’t need for the long term in stocks so that they can work for you. After all, historically, the stock market has offered the highest long-term returns compared to other asset classes.
Here are some stocks that may be worth investing in this month if you have an extra $1,000 you don’t need for at least the next three to five years.
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Canadian Tire stock
Because of its higher product mix in durable goods, Canadian Tire (TSX:CTC.A) stock declined meaningfully during the last two recessions. Both times, the market underestimated the strength of the business. In other words, the stock fell much harder than it should versus the cut in its earnings.
For example, during the global financial crisis, the retailer witnessed its earnings per share (EPS) falling 10% in 2008, but the retail stock declined by as much as a third from peak to trough. In 2009, the retailer saw another 11% in EPS decline, but the stock bottomed in early 2009. This is another friendly reminder that stocks are a leading indicator. So, often, stocks recover much sooner than the recovery of the underlying business.
Another recession may be upon us soon, as economists predict a potential soft landing recession by 2024. Although the retailer is somewhat sensitive to the booms and busts of the economic cycle, Canadian Tire and its umbrella of brands, including SportChek, Mark’s, Atmosphere, Sports Experts, Helly Hansen, and Party City, have contributed to quality earnings throughout the cycle. For instance, the company achieved a solid five-year return on equity of about 18.7%.
So, the dividend stock could be an excellent buy on the pullback, as it corrected approximately 21% from its peak in July. At about $146 per share at writing, analysts believe it trades at a discount of about 20%. Moreover, CTC has a strong dividend track record. Its 10-year dividend growth rate is 17.2%. The current dividend yield is about 4.7%. Its payout ratio is estimated to be sustainable at about 49% of adjusted earnings this year.
For a solid stock with better price momentum, you can turn to Constellation Software (TSX:CSU).
Constellation Software stock
Constellation Software doesn’t give much of a dividend yield. CSU’s dividend yield is only around 0.2%. However, it has been an incredible moneymaker for long-term investors. Constellation Software explains that it “acquires, manages, and builds vertical market software businesses. Generally, these businesses provide mission critical software solutions that address the specific needs of its customers in particular markets.” In other words, its earnings have been wonderfully resilient throughout economic cycles and, in fact, have enjoyed persistent growth.
Constellation’s five-year return on equity is approximately 45%, which is superb. In the last 10 years, the growth stock has delivered annualized returns of about 32.7%, which beat the Canadian stock market returns by 24.8% per year in the period! Investors should note that the stock trades at a much higher multiple than it did 10 years ago.
At about $2,804 per share at writing, the tech stock trades at a discount of only 9% according to the analysts’ consensus 12-month price target. So, it is, at best, fairly valued. If you like the stock, consider targeting to buy on a potential dip in October.
