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Investment Ideas In defence of defensive stocks, Brookfield may hike dividend, and the ‘magic formula’ in selecting equities

Some encouraging words for all the retirees who hold defensive stocks in sectors like utilities, pipelines and consumer staples: You’re doing the right thing.

A report from the fund managers at Capital Group says that low-beta stocks -- those that are less volatile than the benchmark stock index -- are a good fit for investors with a shorter time horizon, including those nearing retirement.

“These [stocks] have a more conservative profile that reduces the risk of losses while at the same time keeping a healthy allocation to equities, which offer superior long-term returns compared to bonds,” Sunder Ramkumar, senior vice-president of client analytics at Capital Group in Los Angeles, writes in the report.

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Mr. Kumar says that high-beta stocks are riskier and more volatile, but deliver higher returns over the long term. But low-beta stocks can be a good compromise for those who are near or in retirement. Mr. Kumar’s research shows they have delivered returns that are almost the same average return as the broad market, while losing less in down markets.”Adding bonds to a portfolio could have lowered downside, but with far lower average returns,” he writes.

The implication here is that a retiree would do better with a portfolio of defensive stocks than with stocks or an ETF reflecting the S&P/TSX composite index or S&P 500. Fortunately, the ETF world has a tonne of options for focusing on low beta stocks. Check out the Canadian and U.S. equity installments of the Globe and Mail ETF Buyer’s Guide for mention of several of these funds.

One is the BMO Low Volatility Canadian Equity ETF (ZLB), which delivered an annualized return of 11.5 per cent over the five years to the end of June. The S&P/TSX composite index made just 4.7 per cent over that period.

Theoretically, low-volatility stocks should disappoint at times when the stock market is surging. But ZLB has actually done just a bit better than the index’s 16.2 per cent gain over the first half of 2019. Don’t count on low-volatility investments to keep up this pattern of providing less downside risk with equal or better upside. Low volatility stocks can be a good option for retirees, but they will at some point lag the more growth-oriented part of the stock market.

And, yes, they can lose money. Defensive stocks are sensitive to rising interest rates, not that this is an issue right now.

-- Rob Carrick

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

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Stocks to ponder

North American Construction Group Ltd. This small-cap stock has been a stellar performer with its share price rising over 34 per cent year-to-date, in addition to the 93 per cent price return realized in 2018. Management provided solid guidance with earnings growth anticipated to continue. The stock is trading at a reasonable valuation and as a result, it has five buy recommendations. Jennifer Dowty profiles the stock.

Brookfield Asset Management Inc. CEO Bruce Flatt continues to sound notes of caution about the global economy, but says the company sees itself ramping up the amount of cash it will generate in the coming years, with stock buybacks and perhaps an increased dividend to follow. David Milstead reports.

The Rundown

A good time to use the ‘magic formula’ in selecting stocks

If the dizzying swings in the stock market over the past few days offer any lesson at all, it’s that sticking to your investing process isn’t always as easy as it sounds during calmer times. That is why investors need a strong process for evaluating stocks, one that will keep them from overthinking, panicking and abandoning their strategies when markets take a turn for the worse. John Reese looks at the so-called Magic Formula for doing just that.

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U.S. banks limp away from hopes of interest margin expansion

Big U.S. banks are under pressure again, as policy-makers around the globe have dashed any hopes that the industry might finally be able to earn more money on loans after more than a decade of rock-bottom interest rates. David Henry and Sinead Carew of Reuters look at the investment implications for U.S. financials.

Others (for subscribers)

Friday’s analyst upgrades and downgrades

Friday’s Insider Report: Board members are buying these two high-yielding securities

Thursday’s Insider Report: These two oversold dividend stocks yielding more than 4% are being bought

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U.S. small-cap stocks under renewed threat from tariffs

How to discover if your portfolio is aligned with your ethical principles

Others (for everyone)

Currency analysts raise forecasts for Canadian dollar

Number Crunchers (for subscribers)

These six dividend stocks have limited exposure to the U.S.-China trade war

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How U.S. information technology stocks stack up on safety and value metrics

Ask Globe Investor

Question: My husband and I have four young grandchildren. Each birthday we deposit $1,000 into an InvestorLine account that we have set up for each one. At this point we are buying Vanguard ETFs. We realize that at some point, when the child receives the money, there will be capital gains. Both sets of parents have their kids registered in RESPs. We do not want to get involved with that. Can you offer another way we can keep doing this but in something that will not get as taxed as our system now? All grandchildren are under 10 years old, so we have lots of time. – Kathie S.

Answer: RESPs are the most tax-effective way to save for your grandchildren’s education. Since you don’t want to use them, there are no other tax-avoidance methods that I know of. They can’t have Tax-Free Savings Accounts until they are 18 and they can’t open RRSPs if they don’t have earned income.

As things stand right now, any interest, dividends, or capital gains earned on the investments made on their behalf will be attributed back to you for tax purposes. That’s because the children are minors. If they were adults, you could give them money without attracting tax.

One suggestion is that you give the $1,000 to the parents, which would be a tax-free transaction. Then they could contribute it to the RESPs that already exist, increasing the amount of education savings.

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--Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

With the ranks of sell-side researchers dwindling worldwide, and with the profitability and usefulness of analyst reports declining amid the passive investing boom, brokerages and investment banks have started to incorporate alternative data into their fundamental research. Tim Shufelt will take a closer look.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Darcy Keith

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