Go defensive and up in quality

The probability of a recession is increasing as central banks raise interest rates quickly. You should buy more defensive stocks that can prosper despite higher interest rates. And you should go up the quality scale to stocks we rate ‘Very Conservative’.

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‘Defend’ your portfolio from a recession

Based on history, it now seems more likely than not that a global recession will strike in 2022 or 2023. As a result, you should make your portfolio more defensive. And you should go up the quality scale.

Defensive sectors of the economy include utilities and, in Canada, financial institutions. Even in difficult times, consumers and businesses need necessities such as electricity and telecommunications. So they’re likely to pay these bills. This gives utilities dependable and growing earnings and cash flow. The utilities, in turn, typically pay attractive and growing dividends to their shareholders.

Here are specific recommendations

Three buy-rated Key stock electric utilities are Canadian Utilities Ltd. (TSX—CU), Emera Inc. (NYSE—EMA) and Fortis Inc. (TSX—FTS; NYSE—FTS). All three pay generous dividends that they regularly raise. This gives you a growing stream of income to offset the rising cost of living. High and growing dividends also attract income-seeking investors who are apt to bid up your stocks. This makes it likely that you’ll receive share price gains. They remain buys whether or not a recession strikes this year or next.

Key stock telecommunications buys include BCE Inc. (TSX—BCE; NYSE—BCE), Quebecor Inc. (TSX—QBR), Rogers Communications Inc. (TSX—RCI.B; NYSE—RCI), Shaw Communications Inc. (TSX—SJR.B; NYSE—SJR), and Telus Corp. (TSX—T; NYSE—TU). We expect Rogers to successfully acquire Shaw since it’s divesting Freedom Mobile. The other four telecommunications companies pay appealing dividends that they regularly increase. They remain buys regardless of when the next recession arrives.

Other sectors are also stable

Pipelines are another fairly stable sector of the economy. Also, the inability to build new pipelines gives those that remain a beneficial scarcity factor. Two Key stock pipeline buys are Enbridge Inc. (TSX—ENB; NYSE—ENB) and TC Energy Corp. (TSX—TRP; NYSE—TRP). One non-Key pipeline buy is Pembina Pipeline Corp. (TSX—PPL; NYSE—PBA). All three pay attractive and growing dividends All three remain buy for growing dividends.

Some consumer stocks are also defensive. The three large Canadian supermarket chains include Key stocks Loblaw Companies Ltd. (TSX—L), Metro Inc. (TSX—MRU) and Sobeys Inc., which is owned by Key stock Empire Company (TSX—EMP.A). Since they’re ubiquitous providers of necessities, we expect them to continue to prosper. Due to inflation, some consumers are finding food less affordable. But many will eat less in restaurants and more at home. The three food retailers remain buys for modest, but growing, dividends and long-term share price gains.

We also advise you to move up the quality-rating scale. We rate all of the companies above as “Very Conservative”. Large companies can usually survive longer and deeper setbacks than their small counterparts. When business conditions improve, big companies either enter markets vacated by their small competitors, or buy them out.

This is an edited version of an article that was originally published for subscribers in the July 8, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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