These are worrisome days for investors. Stocks have been on a roller-coaster ride this month as world economic growth slows and the U.S.-China trade war continues to escalate.
We’re now hearing the dreaded “R” word spoken more frequently. Bloomberg reported that its August survey of economists showed a 35 per cent probability of a U.S. recession in the next 12 months.
Some industry experts are even less optimistic. Jeffrey Gundlach, the CEO of DoubleLine Capital, told Yahoo Finance last week that he puts the chances of a recession before next year’s presidential election in the U.S. at 75 per cent.
If it happens, it would certainly diminish Donald Trump’s chances of re-election. And he would have only himself to blame. Although his supporters argue that someone had to take on China, the way in which he has done so has stunted world trade and hurt the U.S. economy. We have only to look back to the Smoot-Hawley Act of the 1930s to realize how tariffs and isolationism can drag the world into a deep depression that can last for years.
Some economists are advising people to be as liquid as possible in these circumstances. That’s a less frightening way of saying: Sell everything and go to cash.
I don’t think that’s a great idea. We never know what markets are going to do. Who expected six months ago that bonds would be among the big winners so far this year? Or that stocks would hit record highs before the recent pullback?
But if retreating to cash is not the best option, what should you do? Here are five securities that I suggest you hold in your portfolio at this time.
Franco-Nevada Corporation: As often happens in times of market turmoil, gold has been on a roll. The precious metal was trading in the $1,350 (U.S.)an ounce as recently as early May. This month it broke through the $1,500 level and should move higher if trade tensions continue.
Franco-Nevada is in a unique position to benefit from this upside. It’s a royalty company, meaning it doesn’t own any mines itself, with all the cost and risk that involves. Rather, it buys royalty streams from existing or developing mines, providing capital that the mining companies need to maintain or expand their operations. The company owns assets worldwide, including in North and South America, Australia, and Africa.
It’s a highly successful formula and the stock price reflects that. The shares traded as low as $76.53 last October. At the time of writing, they were priced at $123.41.
The company recently reported strong second-quarter income of $64 million ($0.34 per share) compared to $56.3 million ($0.29 per share) last year. (Figures in U.S. dollars.) Third-quarter results should be even better, given the run-up in the gold price.
The stock pays a small quarterly dividend of 25 cents a share but the real reason to own it is as a gold-plated insurance policy in times of market turbulence.
Fortis Inc.: Based in St. John’s, Fortis is a $52-billion company, serving 3.3 million customers with gas and electricity distribution through 10 utility operations.
It’s a perfect stock for the times. It’s interest-sensitive, so the shares perform well when interest rates are falling. Almost all of its revenue comes from regulated industries, which means it is relatively recession-proof. It is not vulnerable to the Trump trade war, with assets in Canada, the U.S., and the Caribbean.
On top of all that, it pays a healthy dividend of 45 cents per quarter, which it has increased annually for 45 straight years. The company is targeting further increases in the 6 per cent range through 2023.
The stock has gained about 19 per cent so far this year, as interest rates have retreated. It was trading at $54.26 at the time of writing, to yield 3.3 per cent.
Northview Apartment REIT: Everyone needs a roof over their heads, whether in good times or bad. Northview provides that, with a portfolio of about 27,000 residential units plus 1.2 million square feet of commercial space in more than 60 markets across eight provinces and two territories.
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Originally, this Calgary-based real estate investment trust focused primarily on the far north. But in recent years it has expanded its operations across Canada and 35 per cent of its net operating income now comes from Ontario.
Like utilities, REITs are interest sensitive, so the shares have benefited from the recent rate decline. Year-to-date, they’re up about 16 per cent. Northview pays a monthly distribution of $0.1358 per unit (about $1.63 a year) to yield 5.7 per cent at the current price.
iShares Core Canadian Universe Bond Index ETF: Yes, I sound like a broken record here, but this is definitely the time to own bonds. Interest rates are sinking to unheard-of levels. About $15-trillion worth of sovereign bonds worldwide are paying negative interest. This week, Denmark’s third-largest bank announced a 10-year mortgage rate of -0.5 per cent. That’s right, the bank pays you to borrow!
In strange times such as these, there seems to be no bottom to bond yields – which means that bond investors are enjoying a windfall in capital gains (bond prices increase as yields drop). This exchange-traded fund, which emulates the performance of the entire Canadian bond market, has gained 8.57 per cent year to date, the most in five years.
And it’s cheap to own. The annual management expense ratio (MER) is a minuscule 0.1 per cent. If you don’t have it in your portfolio yet, what are you waiting for?
CI First Asset High Interest Savings ETF: Finally, if you just want to hold cash, here’s a new option, launched in January. It’s an exchange-traded fund that invests only in high-interest accounts at the major banks. They include Bank of Montreal, CIBC, National Bank, Scotiabank, and RBC.
The fund pays monthly distributions of $0.0941 per unit (about $1.13 annualized), which projects to a yield of 2.26 per cent based on a recent price of $50.05.
You may well ask how that’s possible when none of the banks concerned pay that much on their high-interest savings accounts, except for short-term promotional deals. The company says the answer is that they have negotiated special institutional rates with the banks, based on the amount of money deposited. The fund has accumulated about $55 million in assets so far.
Of course, these payments are not guaranteed, and the fund is not covered by deposit insurance. But the underlying banks are solid, so I consider it a reasonable choice for conservative investors.
Disclosure: I own positions in Franco-Nevada, Fortis, Northview REIT, and the iShares bond ETF.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.