The probability of a recession is increasing day by day. While inflation and rate hikes weighed on risky assets last year, the year 2023 is expected to be worse. The banking crisis and a potential recession might fuel further volatility in markets.
Although TSX growth stocks do not offer a particularly rosy outlook, defensives seem to be the apt choice for investors in 2023. High-quality, less-volatile, dividend-paying companies will likely play well and could outperform broader markets this year. Here are two such TSX stocks to consider that could offer immense portfolio stability in an economic downturn.
Utility stocks have already started gaining steam this month amid the recent turmoil. Canadian top utility stock Fortis (TSX:FTS) is one of my favourite defensive names. Its low correlation with broad market indexes plays well in falling markets.
Fortis has large, regulated operations, which facilitates earnings stability. Even if the economy goes through a bad patch, utility companies like Fortis keep growing steadily. It has grown its net income by around 5%, compounded annually in the last decade. That’s much lower than the broad market average, but it’s common among utilities. Such slow growth makes it a less risky bet.
Fortis stock currently yields a decent 4%. Apart from yield, it is the dividend reliability and stability that make FTS an attractive bet. It has increased shareholder payouts for the last five decades. It aims to raise the dividend by around 5% annually for the foreseeable future.
As central banks raised interest rates last year, utilities notably underperformed. That’s because bonds become more attractive in rising-rate environments. But as the rate hikes are expected to slow down or rather pause soon, utilities will likely be at the centre stage among defensives.
FTS stock has returned 9% compounded annually in the last decade, including dividends. If you compare that with some growth names, that’s evidently an imprudent approach. Utilities are defensives and provide stability during uncertain times. This time as well, if markets see a large drawdown, utility stocks like FTS will likely outperform.
Energy midstream company Enbridge (TSX:ENB) is another top defensive bet one can consider for an impending recession. Its stable dividend and juicy yield make it an appealing bet.
Enbridge does not see a significant impact of volatile oil and gas prices on its earnings. That’s mainly because they are driven by long-term contracts.
As a result, oil producers have seen record earnings growth lately due to higher oil prices, ENB has seen relatively stable growth. This also places it well in a low-price environment. Even in case of a recession, Enbridge will likely keep growing steadily due to its low-risk, fundamentally strong business.
ENB stock currently yields 7%, way higher than the broad market average. It has raised shareholder payouts for the last 28 consecutive years.
ENB has returned 7% compounded annually in the last decade, including dividends. Its stable earnings and dividends will likely drive stable total returns in the long term.