With the economic environment worsening, as central banks continue to increase interest rates to try to cool inflation, it makes sense that many investors are looking to shore up their portfolios with top Canadian dividend stocks ahead of a potential recession.
Recessions are a normal part of the economic cycle, but because they can cause the economy to worsen quite significantly, investors need to be aware of how exposed they are to a recession and how to react if stocks see a major selloff as a result.
First off, itâs essential to understand that the more defensive your businesses are, that is, the more essential the goods or services they offer are, the less likely they are to be impacted by a recession.
On the flip side, companies that sell discretionary goods or services will almost certainly see a larger impact on their operations.
This is because a recession will impact how much discretionary income the average consumer has. And because people canât sacrifice buying essentials, such as food or rent, when their income is impacted, they have to pull back on their discretionary spending.
So, the first step to shoring up your portfolio with top Canadian stocks ahead of a potential recession is to find dividend payers that have reliable and defensive business operations.
Why are dividend stocks the best stocks to buy ahead of a recession?
Generally, dividend stocks will fare better than non-dividend-paying stocks in a recession for a couple of reasons.
First off, companies that pay dividends are ones that are well established and have been earning a profit for years, allowing them to pay some of that profit back to investors.
On the flip side, stocks that donât pay a dividend usually donât do so because they either arenât profitable yet or because they are still in growth mode and are reinvesting their profits back into growing their core operations.
So, these up-and-coming businesses typically see a larger impact on their operations than well-established defensive companies.
Furthermore, when the economy is in a recession, stocks often decline in value or are flat, making dividends some of the only returns you could earn for a little while, which often increases the demand for these reliable dividend stocks, another main reason why they are almost always less volatile than the broader market.
So, if you’re looking to improve the resiliency of your portfolio today before we potentially see a recession, here are two top Canadian dividend stocks that have stood the test of time.
Two top Dividend Aristocrats you can buy with confidence today
There are several high-quality dividend stocks you can buy now to shore up your portfolio, especially on the Canadian Dividend Aristocrats list. But two of the best to consider, with some of the longest dividend-growth streaks in Canada, are Fortis (TSX:FTS) and Enbridge (TSX:ENB).
Fortis is one of the most impressive dividend stocks in Canada. It’s a massive $26 billion utility stock with operations located all over North America and a track record of consistent growth both with its operations and its dividend.
In fact, Fortis’s dividend-growth streak is the second longest in Canada at an unbelievable 49 consecutive years.
This just goes to show what a reliable and defensive investment it is to be able to consistently weather the storm when a recession hits and not only keep its existing dividend intact, something other companies can’t always manage to do but actually increase its dividend through these periods.
Today, the stock offers a yield of more than 4.3% and, in just the last five years, has increased its annual payout by 31%, reminding investors why it’s one of the best Canadian dividend stocks to buy today.
However, Enbridge, although not fully a utility stock, does have utility operations and, in many ways, is very similar to Fortis.
Just like Fortis, Enbridge has operations that are essential to the North American economy and is constantly growing its distributable cash flow as it expands its operations.
It also has one of the longest dividend growth streaks in Canada at 27 years and offers a yield of roughly 8% today, making it another top Canadian stock to consider adding to your portfolio ahead of a recession.
The post Recession-Proofing With Dividends: Canadian Picks That Stand the Test of Time appeared first on The Motley Fool Canada.
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Fool contributor Daniel Da Costa has positions in Enbridge. The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy.