The Return of Volatility: Now What?
In case you haven’t looked at the market today, you may want to take a long, deep breath, as we’re seeing the return of volatility! As the time of writing, the market is down sharply over 300 points. By the end of the day, that number will have more dips and bumps than a roller coaster, but the fact remains … we’re looking at some serious volatility.
Arguably, you could say that volatility never really left. Where exactly does this leave investors, particularly those that haven’t seen this pullback before? In short, seeking safe, defensive investments that will not only weather the current storm but also thrive.
Fortunately, there are plenty of great stocks to help offset that bumpy ride.
To beat volatility, you need to diversify and have a strong defence
I know it sounds cliché, but the best offence sometimes really is mounting a good defence. This is where defensive stocks like utilities come into play. Two great ones for investors to consider are TransAlta Renewables (TSX:RNW) and Fortis (TSX:FTS)(NYSE:FTS).
Utilities have incredibly stable business models. They provide a necessary service to which they are compensated. That service and the amount of the compensation are stipulated in regulatory contracts. Furthermore, those contracts can and typically do span one or more decades.
In other words, as long as utilities like Fortis and TransAlta keep the supply of power running, they keep earnings a stable and recurring revenue stream. That sounds good, right?
Stability = less volatility and something extra
Because of the nature of the service that they provide, utilities are incredibly defensive investments, even in times of increasing volatility. Utility service isn’t something that you can choose to cut from your budget or cut spending on, like groceries. It’s that stability and necessity which makes them great defensive picks.
That’s not all — in the case of Fortis, the utility is one of the largest on the continent with a generation and distribution business that operates across Canada, the U.S., and the Caribbean. And unlike many of its traditional utility peers, Fortis continues to invest in new facilities, entering new markets and transitioning to renewable energy.
Speaking of renewable energy, let’s take a moment to also mention TransAlta Renewables. TransAlta is a growing renewable energy player. The company has a portfolio that includes facilities in the U.S., Australia, and here in Canada. Additionally, TransAlta’s facilities encompass multiple types of renewable energy. Those facilities include solar, wind, gas, and hydro elements.
So, what is that something extra that both Fortis and TransAlta offer? That would be some solid income-earning potential.
Fortis offers investors a quarterly payout with a yield of 3.29%. This means that a $30,000 investment in Fortis will provide a first-year income of $987. Fortis also has an established precedent going back 48 years of providing a generous annual uptick to that dividend. This fact alone should place Fortis near the top of any investor’s shopping list.
Turning to TransAlta, the company also offers a tasty dividend but does so on a more frequent monthly cadence. TransAlta’s distribution works out to a yield of 5.15%, meaning that same $30,000 investment will earn a monthly income of $128.
In both cases, investors not ready to draw on that income can reinvest it until needed, which elevates the long-term income potential further.
The return of volatility: No cause to worry
It can be tough looking at the marketing taking a steep dive. The important thing to keep in mind is that, long term, the market will always correct itself. If anything, times where the market takes a dip represent good times to buy into stocks at a huge discount.
While no investment is without risk, both TransAlta and Fortis are great stocks that can provide growth and income generation for decades. In my opinion, one or both stocks should be part of any well-diversified portfolio.
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Fool contributor Demetris Afxentiou owns Fortis Inc. The Motley Fool recommends FORTIS INC.
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