Top Canadian Stocks to Hold During a Recession

In a recession where markets are prone to heavy volatility and uncertainty, generating stable returns is hard to come by. However, compared to other stock markets, Canada harbours some of the most dividend-focused companies. Not only are these companies consistently growing their dividend, but have been resilient in past recessions.

Here are the top Canadian stocks to hold during a recession.

Royal Bank of Canada (RY)

FILE PHOTO: The Royal Bank of Canada (RBC) logo is seen outside of a branch in Ottawa, Ontario, Canada, February 14, 2019. REUTERS/Chris Wattie/File Photo

Despite being the largest Canadian financial institution and ‘boring’ in nature to many growth-focused investors, Royal Bank has flourished in the past couple years as shareholders raked in consistent dividend income and capital appreciation. In fact, the stock has outperformed the S&P 500 year-to-date.

In the past ten years, Royal Bank has grown its dividend tremendously. As of right now, the annual dividend payout for each share is $5.12, which gives it a dividend yield of 3.85%. With dividends included, the stock softened the volatility of woes and worries revolving around the economy.

In addition, Royal Bank’s payout ratio, which is derived from how much of earnings is paid out to shareholders, is 33.4%. This ratio is low enough that the company could continue to raise the dividend for many years, even without substantial earnings growth. The bank’s revenue and earnings growth has also been stellar in contrast to other companies which have seen headwinds, rising costs, and reduced headcounts. These strong fundamentals indicate that the dividend safety is high.

Royal Bank has shown investors predictability and certainty in a market of declining confidence. Looking forward, Royal Bank stands to benefit from rising interest rates. For investors who want exposure to the financial sector without volatility and oversized risk, RY stock could be a great option.

Canadian Pacific (CP)

FILE PHOTO: A Canadian Pacific Railway crew works on their train at the CP Rail yards in Calgary, Alberta, April 29, 2014. REUTERS/Todd Korol/File Photo

Up next is Canadian Pacific. The company, which owns and operates one of the largest railway networks in all of Canada, has seen tremendous stability in the past year. Despite ongoing macroeconomic headwinds, Canadian Pacific has been resilient in growing its revenue and earnings,

Right now, the company provides an annual dividend of $0.76 per share. While the dividend is not that substantial, its rapid growth is what intrigues investors. In the past ten years, the dividend has tripled, factoring in the 5:1 stock split last year. Like Royal Bank, the same case can be made with Canadian Pacific, since its dividend payout ratio is a mere 21.2%. The future earnings growth potential is sizable.

Canadian Pacific shares have outperformed the S&P 500 in the past year, likely due to earnings growth in the latest quarter of over 88.7% year-over-year. In one month alone, Canadian Pacific shares are up 11%. Moving forward, Canadian Pacific is well positioned to continue paying out shareholders in the form of stable, growing dividends, and potentially further stock price appreciation.

Closing Thoughts

Both Royal Bank and Canadian Pacific have demonstrated their resilient stance in the stock market, particularly during a time when volatility is prominent. Looking ahead, we can expect both companies to continue distributing and raising their dividends given their low dividend payout ratios. These two companies could make an investor’s portfolio nearly inflation and recession-resistant, which is extraordinarily rare to find anywhere else.