Whether we’re in a bull or bear market, it always helps to have a portion of your portfolio in defensive stocks, so-called because of the relative protection they offer from price volatility and many business and market risks. This is not to say that there are no risks involved with defensive stocks. Any company is going to be subject to a certain amount of management and overall economic risk. But comparatively speaking they are definitely less risky than technology stocks or high growth-only stocks.
Two traditionally defensive sectors have always been the telcos (telecommunications) stocks and the pipelines and utilities stocks. Telecommunication stocks are, in some sense, also infrastructure plays and have a good support base in that people will continue to subscribe to basic phone and internet services even in a recession – just imagine deciding to go without those during the 2008-2009 “Great Recession” – unimaginable! Similarly, pipelines are absolved from most commodity risk – they don’t produce oil or gas, they just transport it, day and night, in any economic weather.
For Canadian investors and those looking to expand into the Canadian market for some equity diversification or currency protection, here are some of the top defensive plays in Canada. There are a few more that I could have listed here, but these are the big names for protecting your money while still bringing in some income and staying open to modest growth.
Telcos, the “Pipelines of Data:” Reap The Benefits of Tech Stocks Without The Risk
Rogers Communications (TSX: RCI.B) – Rogers is a full-service provider of cable, internet and phone solutions for a majority of the Canadian market. It has operations in both the production and distribution of content. It also sells communications hardware such as mobile and wireless networking solutions. The one feature talked most about recently is that they carry RIM’s line of Blackberry products – and does this give them a distinctive edge, or a liability? Go with Rogers if you want stock growth and also a good chance of increasingly rising dividends.
Telus (TSX: T) – Perhaps Rogers’ main upstart rival against the vast backdrop which is Bell Canada. Telus focuses more on mobile phone solutions and not the TV business. It has posted robust growth, rising dividends and a great profile going forward. There have been rumors of its possible acquisition by BCE, but these have never grown much bigger than speculations and there are no stated plans of BCE’s acquiring any company right now.
Bell Aliant Regional Communications Fund (TSX: BA.UN) – This is mostly an Eastern Canada operator, similar to Telus, but this is a specifically income trust structure which pays monthly distributions on its units. While it doesn’t have a huge growth profile going ahead, it is considered a fairly defensive, stable and great income play at least until 2011, when it will probably convert its distributions to dividends and maintain the same payout.
BCE (TSX: BCE) – This is the largest communications company in Canada and just last year almost made news as being the largest takeover in Canadian history (actually, even in North American history, I believe – someone can correct me). The acquisition by the Ontario Teachers’ Pension Plan did not go through for a variety of reasons, but since then the stock has really languished despite a new (highly reputed) CEO and continued retail strength. Most analysts don’t bet on this company for great growth in the future (leave that to Rogers and Telus), but it is a great source of dividend income. This is one of the bluest of the blue-chips.
Utilities and Pipelines: Who Says the Stock Market Has To Be A Roller Coaster?
TransCanada (TSX: TRP) – Natural gas pipelines and gas storage – all over North America. And growing their electricity generating portfolio. They consistently grow their dividends. Even better, their stock price isn’t as subject to the crazy swings of nat gas prices since they are only a carrier.
Enbridge (TSX: ENB) – Another interesting comparison with TransCanada, but Enbridge operates the world’s longest crude oil pipelines throughout North America. But like so many oil companies, they also have natural gas portfolios. So they also own and operate Canada’s largest natural gas distribution company, Enbridge Gas, which actually also provides gas to New York State. Another subsidiary is the Enbridge Income Fund.
InterPipeline Fund (TSX: IPL.UN) – There are a lot of pipelines in Canada, and there is also more than one pipeline income trust. But this is the one that I’ve seen more analysts recommending most lately. It pays a consistent distribution and has a competitive profile. The company distributes and stores both conventional oil and oil sands liquid as well as natural gas. Because it’s just a distributor, it’s not as subject to the high volatility that is usually found the oil and gas commodity stocks.
Fortis (TSX: FTS) – Fortis is the largest public gas and electricity distribution utility in Canada (a more diversified version of TransCanada, perhaps). It operates gas in BC, electricity in 5 other Canadian provinces, but also in 3 Caribbean countries and upper New York State. It also runs hydroelectric facilities in Belize and on top of all this, just for some added diversification, it owns hotels and commercial real estate throughout Canada. So it’s a utility plus a REIT, sort of. All of which makes for a very quiet stock that just slowly grinds forward and raises its dividends every year.
Emera (TSX: EMA) – The generation and distribution of electric power in Atlantic Canada and the Northeastern US – as well as two Caribbean locations. It’s also involved in building pipelines for natural gas distribution and owns a variety of energy and electrical power investments. Recently the company has been increasing the dividend on a yearly basis, too.
TransAlta (TSX: TA) – Electricity generation and marketing is this company’s focus. They’re also moving in the direction of wind power and have currently been in talks to acquire a wind power producer in Eastern Canada – talks which might fall through, but no doubt TransAlta will expand its wind profile in another way. This company is a solid bet – but it doesn’t raise its dividend as frequently as Fortis or TransCanada, however.
In addition to low volatility and less risk exposure, these asset sectors offer the value-added advantage (in my opinion) that they afford some of the benefits of the high-tech and environmental sectors without the initial risk exposure. TransAlta’s bid for wind developers Canadian Hydro is one great example. Most of these companies are also in the renewable energy business on the side, so their stock is a great way to play the green energy story without getting involved with start ups.
One of these companies also makes the list of the top 10 Canadian Dividend-Paying Multinationals. Five of these companies also made my list of the Best Canadian DRIP plans (I might revise the list a bit now). In any case, it’s no surprise that 9 of the above 10 companies have DRIP plans of their own.
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