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Rob Carrick

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A six-pack solution

Rob Carrick

Tough stock markets ahead? Perhaps a six-pack might get you through.

Malt beverages are not on the menu here, unless you're parched. We're after much more substantial fare in the form of stocks that might help you survive the adversity of recession and flat stock markets. How about a six-pack of them to get you thinking about what to look for in the way of foul-weather investments?

We start our search with TSX-listed dividend-paying common shares. Dividends indicate a company has a certain degree of financial strength and discipline, and they provide you with income that flows into your portfolio regardless of whether your shares rise or fall in price. In non-registered accounts, dividends offer the additional benefit of a much lighter tax hit than interest income.

Stocks with high dividend yields (let's say 5 per cent and up) are tempting, but they're generally to be treated with caution because of the fact that sky-high yields go hand in hand with plunging share prices. When investors abandon a dividend stock en masse, it's a sign they're worried about their quarterly cash payouts could be cut or suspended. Still, we'll make an exception here for Manitoba Telecom Services, which had a juicy yield in early April of 6.6 per cent. MTS has fallen along with other telecom stocks in the past year or so, but analysts seem reasonably confident that the dividend will be maintained. With that 6.6-per-cent yield, you're getting well compensated for any risk associated with the dividend.

Utility stocks are classic defensive investments, so let's add the pipeline company Enbridge to our list. Enbridge was up almost 15 per cent for the 12 months to April 14 while the S&P/TSX composite rose just 1.2 per cent. Also, Enbridge has a dividend yield around 3.2 per cent, just about what you'd get from a 10-year Government of Canada bond, and it has a history of regularly increasing its cash payouts.

Another good recession-resistant sector is consumer staples, and an obvious choice in this area would be a grocery chain like Loblaw Cos. Let's skip the food guys, though. They're in a viciously competitive field right now and this could undermine their ability to hold up in nasty stock market conditions. Instead, how about Shoppers Drug Mart? The dividend yield here is nothing to get excited about at 1.7 per cent, but Canada's largest drugstore chain has more than doubled its quarterly cash payout over the past three years.

Financials are a dicey proposition right now because of the exposure that some firms have to the U.S. subprime mortgage fiasco. A recession and flat market would be bad for business as well, particularly for banks and mutual fund companies. Still, you can make a case for some conservative exposure to the financial sector through the conglomerate Power Corp., which has interests in insurers like Great-West Lifeco and money managers like IGM Financial. Power is one of the bluest of Canada's blue-chip stocks and it regularly clocks in with dividend increases.

Commodity stocks have been the big story in the Canadian stock market over the past five years, but there's reason to be leery of them in recessionary times. And yet, there are a lot of commodity bulls out there who believe that demand from emerging economies like China and India will sustain demand. So let's throw one commodity stock into our mix, either EnCana or Teck Cominco. Both pay dividends yielding around 2 per cent these days and dividend increases are possible because of all the cash they're generating these days. Which of the two should you choose? EnCana if you believe oil and gas prices have more buoyancy and Teck if you believe base metals are the place to be. I'll take EnCana.

Finally, let's throw in a somewhat off-the-wall contrarian play Torstar Corp. As a newspaper company, Torstar would be vulnerable to an advertising slowdown in a recession. But this is a stock that seems to have a lot of bad news already priced in. The stock has lost one-third of its value in the past five years, and its decline in the 12 months to April 14 was almost 18 per cent. Why bother with it? Because a lot of noted value investors bargain hunters who seek downtrodden stocks with hidden attributes are holding Torstar right now, and because it pays a dividend yielding 4.4 per cent. If tough stock markets are ahead, investors might just find an already beaten down name like Torstar to their taste.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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