Written by Puja Tayal at The Motley Fool Canada
The stock market is a gamble for those who invest without understanding the risk and a wealth generator for those who take calculated risks. Even the safest of stocks are prone to risk in the event of a major crisis. While you can’t avoid risk, you can mitigate it by diversifying your portfolio across four types of low-risk stocks.
Dividend stocks are one of the safest options for risk-averse investors. These are the companies that offer essential services like banking, energy, oil, and telecommunication. The demand for such products will exist in every crisis. The price of these products forms a significant part of the inflation basket. They also have high entry barriers as such services require a huge investment in infrastructure and regulatory approvals.
Enbridge (TSX:ENB)(NYSE:ENB) has the largest oil and gas pipeline infrastructure in North America. It has been paying dividends for more than 40 years from the toll money it collects from utilities. The company has been increasing dividends for 26 years by adding new pipelines. It has a robust model, but even then, it is prone to risks. It is becoming difficult to build new pipelines due to environmental issues. Moreover, Enbridge’s cash flows will be affected if one of its pipelines is disrupted in a manmade or natural disaster.
Despite these risks, Enbridge has been paying dividends regularly and can continue paying them for several years. But not all dividend stocks pay regular dividends. At times of crisis, some companies even cut dividends or stop paying them. That is a risk you face.
Other than essential services, the nature of some businesses is such that they continue to remain resilient under any crisis — for instance, essential retail stores, agriculture, and logistics businesses. They do not give dividends but offer stable and sustainable growth.
Descartes Systems (TSX:DSG)(NASDAQ:DSGX) is in the business of supply chain management. It caters to all types of businesses that need to transit goods, people, information from one place to another. During the pandemic, the stock surged on the back of e-commerce volumes. In 2018, it surged as the United States-China trade war created the need for excise clearance. And now, in the economic reopening, it is benefitting from airlines’ passenger volumes.
Don’t expect much growth from resilient stocks, but you can expect them to reduce downside risk in a crisis when other stocks fall. The resilient stocks also fall in crisis, but they recover to their previous levels in a short duration. A good strategy would be to buy such stocks at the dip.
The stock market performance depends on the conducive business and economic environment. But alternative assets like gold and real estate flourish when the economy is weak. These assets do not give significant returns but act as a hedge against inflation. Moreover, they are expensive to buy.
An easier and cost-effective way to get exposure to alternative asset classes is investing in a gold ETF or a REIT. SmartCentres REIT is a good option, as it also pays monthly dividends from the rental income it collects from merchants. SmartCentres has retail stores in prime areas of Canada that help it collect higher rent. It is now building residential and commercial spaces for rent and sale to increase the value of the land. For less than $31, you can get exposure to hot properties and earn a dividend yield of over 6%.
Index funds and ETFs
Being risk averse doesn’t mean you do not tap the growth the market offers. There are several themes or sector-based index funds and ETFs that invest in top stocks. For instance, tech is one of the most lucrative sectors for growth, and, at the same time, it’s risky. But iShares S&P/TSX Capped Information Technology Index ETF gives you exposure to the price movement of 19 top tech stocks. A diversified portfolio of large and small-cap tech stocks gives you growth while mitigating risk. To give you a hint of the reward, the ETF surged 32% year to date.
A risk/reward portfolio
A risk-averse investor takes calculated risk and seeks rewards for the same. The above stocks will reward you with dividends and a recovery rally for the risk you take.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Smart REIT.