Yesterday, the United States Bureau of Labor Statistics reported that the November Producer Price Index (PPI) rose 0.4%, higher than analysts' expectation of 0.2%. The PPI rose 3% year over year — the biggest increase since February 2023. Higher-than-expected inflation in the United States has weighed on the global equity markets, with the S&P/TSX Composite Index falling 0.96% yesterday. The ongoing geopolitical tensions and threats of tariffs are causes of concern.
Given the uncertain outlook, investors can strengthen their TFSA (Tax-Free Savings Account) by adding defensive stocks to avoid a decline in their contribution room in case of a steep correction. Against this backdrop, here are my three top picks.
Waste Connections
Waste Connections (TSX:WCN) is a waste management company that has expanded its footprint in the United States and Canada through organic growth and strategic acquisitions. Supported by its solid underlying businesses and growth initiatives, the company has been driving its financials and stock prices at a healthier rate. Over the last 10 years, the company has returned around 515% at an annualized rate of 19.9%.
Moreover, WCN continues its organic growth and strategic acquisitions to boost its financials. It is building several renewable natural gas (RNG) and resource recovery facilities, with the management projecting 12 RNG facilities to become operational in 2026. The company is also implementing technological advancements, such as robotics, optical sorters, and AI (artificial intelligence), which could improve employees' safety and operating efficiency. Notably, the company has raised its dividends at an annualized rate of around 14% since 2010. Considering all these factors, I believe WCN would be an excellent addition to your TFSA.
Dollarama
Dollarama (TSX:DOL) is another excellent defensive stock to have in your portfolio due to its consistent same-store sales, irrespective of the broader market conditions. Its superior direct-sourcing model and efficient logistics system allow it to offer various consumer products at attractive prices, thus enjoying healthy footfalls even during a challenging macro environment. The company focuses on expanding its store network and expects to increase its store count from 1,601 to 2,200 by the end of fiscal 2034.
Dollarama also plans to build its second logistics hub and is working on acquiring land in Calgary, Alberta, for $46.7 million. The management is projecting a capital expenditure of $450 million to construct the facility, which the management expects to commission by the end of 2027. This facility would support its growth and improve operating efficiency. Further, Dollarama owns a 60.1% stake in Dollarcity, which has also planned to expand its store network from 588 to 1,050 by the end of 2031. Dollarama also owns an option that would allow it to increase its stake in Dollarcity to 70% by the end of 2027. Considering its solid underlying business and healthy growth prospects, I believe Dollarama would be an ideal addition to your TFSA in an uncertain outlook.
Hydro One
Hydro One (TSX:H) is a pure-play electricity transmission and distribution company, with 99% of its business rate regulated. With no material exposure to commodity price fluctuations, the company's financials are less susceptible to broader market conditions, thus making it an excellent defensive bet. The utility company has been expanding its rate base at an annualized rate of 5% for the last six years, boosting its financials and cash flows. Supported by its healthy cash flows, the company has raised its dividends at a 5% CAGR (compound annual growth rate) since 2016.
Moreover, the demand for electricity is rising amid government policy changes favouring electrification, technological development, and increasing income levels, thus driving the demand for Hydro One's services. The company is also expanding its asset base, with a $11.8 billion capital investment plan that it expects to invest between 2023 and 2027. Along with these investments, its continued focus on improving operating efficiencies could allow it to boost its financials and maintain its dividend growth in the coming years.
