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2 Stocks to Invest in a Sideways Economy

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Image source: Getty Images

Written by Tony Dong at The Motley Fool Canada

Are you worried about the prospects of a Canadian recession — or worse, stagflation? Are you concerned about your flashy growth and tech stocks suffering an agonizing demise in the face of a sideways-trading, range-bound market?

Well, I have the solution for you: low-volatility, dividend-paying stocks — two from Canada’s utilities sector, which houses the vital companies that power our homes, supply our water, and keep us connected.

Even when the economic indicators flatline, and the market seems to be stuck in a loop, these companies have a remarkable habit of maintaining steady operations, thanks largely to the essential nature of the services they provide.

This stability often translates into predictable, lower-risk returns for investors in the form of dividends. These regular payouts can provide an attractive income stream — a feature that becomes especially valuable when share price appreciation is absent.

What we’re looking for

Our search for the ideal two stocks focuses on two main metrics: beta and forward annual dividend yield.

First up is beta. Simply put, beta is a measure of a stock’s historical volatility in relation to the overall market. It’s like a yardstick for comparing a stock’s ups and downs to those of the market as a whole.

The market is assigned a beta of one. If a stock has a beta of one, it means the stock’s price has historically and is expected to move with the market. If the market goes up by 5%, the stock should also go up by around 5%, and vice versa.

Now, a stock with a beta less than one is considered to have low volatility. This means it’s less likely to experience big price swings and is generally less risky than the overall market.

If a stock has a beta of 0.5, it’s theoretically 50% less volatile than the market. So, if the market goes up by 10%, the stock should only go up by around 5%. Conversely, if the market drops by 10%, the stock should only drop by around 5%.

Next, we want to screen for stocks with a forward annual dividend yield of 3% or greater, while maintaining a payout ratio lower than 80%.

Basically, we’re looking for a stock that will provide an annual income of at least 3% based on its current price. The term “forward” means that it’s based on future projections via the most recent dividend, rather than historical yields.

Finally, a payout ratio lower than 80% suggests screens for companies that retain at least some portion of their earnings for reinvestment or to cover future challenges to ensure financial health.

Potential candidates

Based on the above criteria, I found two Canadian utility sector stocks that currently have a five-year monthly beta of lower than 0.5, have a projected forward annual dividend yield of 3% or higher, and have a payout ratio under 80%.

  1. Hydro One: 0.25 beta; 3.05% forward annual dividend yield; 65.7% payout ratio.

  2. Fortis: 0.17 beta; 3.90% forward annual dividend yield; 74.83% payout ratio.

Which one is better? Honestly, I would buy both for greater diversification and then supplement each with some additional Canadian dividend stock picks from other sectors (and the Fool has some excellent suggestions below!)

The post 2 Stocks to Invest in a Sideways Economy appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.