L:CC - Defensive Sectors: A Safe Haven for Canadian Investors in a Bear Market
2023-12-06 20:00:00 ET
After years of significant gains from the stock market, we’re now seeing economic headwinds increase, causing a tonne of uncertainty in the market today. And while a worsening of investing conditions could certainly be concerning, usually, Canadian investors can simply increase their investments in defensive sectors in order to shore up their portfolio ahead of a bear market.
Defensive sectors are those that contain businesses that see little to no impact from a worsening economy. These are essential businesses such as residential real estate, utilities, or consumer staples, which include groceries and other essential household items.
For example, regardless of whether there is a recession, people need to eat, they need somewhere to live, and they need electricity and gas utilities. Therefore, businesses that offer these services will see much less of an impact on their operations or their stock price as a result of a worsening economy.
If Canadians need to cut their budgets, they will most likely do so in sectors that are considered discretionary, such as eating out, buying new clothes and jewellery, or taking an expensive vacation.
Therefore, when the economic environment begins to worsen, one of the first things to do is look to see how many of your investments are in defensive businesses and how many are in discretionary ones.
And if you think you need to shore up your portfolio, adding defensive stocks is the perfect way to do so, especially in a bear market. So if you’re looking to find stocks in defensive sectors, here are two top choices to consider today.
A top utility stock, one of the most defensive sectors
It’s important when buying defensive stocks that you diversify your investments and own stocks across many different sectors. With that being said, though, some of the best defensive stocks to buy are in the utility sector.
This is because, as I mentioned above, utilities offer essential services. However, in addition, they often have a monopoly and are regulated by the government, which makes both their revenue and profitability highly predictable.
In Canada, there are several high-quality utility stocks, but one of the very best is Fortis ( TSX:FTS ), the massive $27 billion company.
Fortis offers both electricity and gas services and has operations spread all across North America, which makes an already defensive stock in a low-risk industry even less risky.
And because it’s such a reliable company and has such predictable revenues, Fortis, as well as its utility stock peers are all excellent dividend stocks.
Not only do these defensive stocks in the utility sector offer attractive yields, but they also offer consistent dividend growth potential. In Fortis’ case, the stock has increased its dividend for an unbelievable 50 straight years , and today, it offers investors a yield of roughly 4.2%.
So if you’re looking to shore up your portfolio while uncertainty continues to increase, Fortis or a high-quality utility stock like it can be an excellent choice.
An impressive consumer staple stock
In addition to utilities, stocks in the consumer staples sector are also ideal defensive investments. And while there are plenty of different consumer staples stocks to consider, one of the top choices is Loblaw Companies ( TSX:L ).
Loblaw is ideal because it’s a massive grocery business with some of the best-known bands across the country. In addition, though, it also owns Shoppers Drug Mart, another dominant and well-known company in Canada, which also happens to be a defensive business.
Therefore, Loblaw and its well-diversified portfolio of defensive retail operations make it one of the best stocks you can buy in the consumer staple sector to shore up your portfolio.
For example, in the last three years, as the economy has faced headwinds like the pandemic, supply chain issues, surging inflation and now rising interest rates, Loblaw stock has more than doubled (up 103.5%), while the TSX has gained just 16.7%.
So if you’re worried about rising uncertainty and are looking to add defensive stocks to your portfolio, Loblaw and the rest of the consumer staple sector are some of the best investments to consider first.
The post Defensive Sectors: A Safe Haven for Canadian Investors in a Bear Market appeared first on The Motley Fool Canada .
Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy .
2023