With stock markets hitting record highs recently, worries about a major pullback loom.primeimages/iStockPhoto / Getty Images
September has a reputation for heightened market volatility and is often the worst month for stock returns.
One theory for this so-called “September Effect” is that institutional investors returning from holidays will re-assess their portfolios to lock in gains and harvest tax losses before year-end.
With stock markets hitting record highs recently, worries about a major pullback loom. Although a U.S. central bank rate cut in September could inject fresh momentum into the market, U.S. tariffs and geopolitical tensions could keep volatility high.
Globe Advisor asked three portfolio managers for their top defensive stock picks heading into fall.
Bunty Mahairhu, portfolio manager and research lead for equities, CI Global Asset Management, Toronto
The fund: CI Canadian Dividend Fund
The pick: Empire Co. Ltd. EMP-A-T
Empire, whose grocery banners include Sobeys and Safeway, operates in a five-player oligopoly and trades at a significant discount to its two Canadian peers, Mr. Mahairhu says.
The Stellarton, N.S.-based firm, which has raised its dividend for 30 straight years, is a defensive stock because “people need to eat whether it is strong or weak economy,” he adds.
Empire has “structurally lower margins” compared with Loblaw Companies Ltd. L-T and Metro Ltd. MRU-T, which have more discount grocery stores attracting consumers amid rising inflation, but that trend should normalize, he says.
Shares of Empire, which have about a 1.5-per-cent dividend yield, are fairly valued at about 17 times 2026 earnings, he says. However, this grocer is still compelling because it aims for 8- to 11-per-cent annual earnings growth over the medium term, he adds.
Wage inflation is a risk because it’s one of the largest input costs in the low-margin grocery business.
The pick: Fortis Inc. FTS-T
Fortis, a regulated gas and electric utility, is a very stable business and is notable for having raised its dividend for 51 consecutive years, says Mr. Mahairhu.
The St. John’s, Nfld.-based company, which has multi-year agreements, gets 57 per cent of its revenue from the U.S., 38 per cent from Canada and 5 per cent from the Caribbean.
Fortis is defensive because electricity is a necessity, he says. It has about a 3.5-per-cent dividend yield and is targeting 4- to 6-per-cent annual dividend growth through to 2029, he adds.
Its stock is fairly valued at nearly 20 times 2026 earnings, but Fortis has tailwinds, he says. A $26-billion capital program ending in 2029 gives earnings visibility, while it can benefit longer-term from rising energy demand at data centres and the onshoring of U.S. manufacturing, he adds.
Rising interest rates are a risk because of higher debt costs.
Robert Lauzon, chief investment officer and portfolio manager, Middlefield Ltd., Toronto
The fund: Middlefield Income Plus Class
The pick: Boardwalk Real Estate Investment Trust BEI-UN-T
Boardwalk, Canada’s second-largest apartment owner-operator, has an attractive valuation and benefits from no rent control in Alberta, where it has two-thirds of its units, Mr. Lauzon says.
The Calgary-based REIT, which trades well below an estimated net asset value of $85 to $90 a unit, is a defensive play because tenants will forgo other purchases but pay their rent, he says.
Boardwalk, which has a dividend yield of about 2.3 per cent, is expected to increase its cash flow by 7 to 8 per cent annually over the next few years, versus 3 to 5 per cent for most peers, he adds.
The REIT’s units tumbled after Ottawa unveiled plans last fall to reduce the number of immigrants over the next three years, but investors – especially from the U.S. – are starting to return to the sector, he says. Alberta is also still experiencing net immigration.
Risks include rising interest rates and rental control.
The pick: Topaz Energy Corp. TPZ-T
Shares of the royalty and energy infrastructure company have more upside as the market hasn’t priced in the organic and acquisition growth that “we expect over the coming year,” Mr. Lauzon says.
“Topaz Energy could trade at $28 to $29 a share in 12 months.”
The Calgary-based firm is a defensive play because it gets 75 per cent of its revenue from oil and gas royalties, and 25 per cent from infrastructure assets owned by other energy companies, he says.
The stable cash flow from the infrastructure assets pays for 45 per cent of Topaz’s dividend yield, which is now over 5 per cent, he says. Oil and gas royalties from firms such as Tourmaline Oil Corp. provide growth.
Topaz Energy’s stock, which is fairly valued, has declined with lower commodity prices, he says, but will benefit from higher natural gas prices once LNG exports ramp up on Canada’s West Coast.
Michael Simpson, portfolio manager, NCM Asset Management Ltd., Toronto
The fund: NCM Dividend Champions
The pick: Hydro One Ltd. H-T
Hydro One, a utility focused on electricity transmission and distribution, provides a stable revenue stream and has a history of raising its dividends, Mr. Simpson says.
The Toronto-based company is the largest Ontario utility, and its largest shareholder is the provincial government. The company is a defensive play because its revenues are regulated, he says.
Hydro One is targeting annual earnings-per-share growth of 6 to 8 per cent through 2027, as well as a 6-per-cent annual dividend growth rate, he says. Its dividend yield is now about 2.6 per cent.
The utility also has longer-term growth potential in providing power to the Ring of Fire area of Northern Ontario, where the province aims to develop critical-mineral mining projects, he adds.
The utility’s stock is “fairly valued” at around 22 times 2026 earnings, but it should hold up well in a market pullback, he says.
Rising interest rates and a steep recession are risks to the stock.
The pick: Emerson Electric Co. EMR-N
Emerson Electric, a global technology, software and engineering company, has a stable business and has raised its dividend for 68 straight years, Mr. Simpson says.
The St. Louis, Mo.-based firm makes everything from valves for LNG plants to software for regulating electricity flow, he says. “About 20 per cent of its revenue comes from oil and gas plants.”
Emerson, which has a strong balance sheet, should benefit from corporate tax cuts and accelerated-depreciation provisions in the recently adopted One Big Beautiful Bill Act, he adds.
Its second-quarter results beat expectations, but Emerson cut its annual sales growth forecast, which disappointed analysts, Mr. Simpson says.
Emerson’s shares are fairly valued, but the company offers “good growth potential due to its exposure to artificial-intelligence data centres and LNG facilities,” he says.
A big risk is a global economic downturn.