It is not secret that the Canadian stock market is not very well diversified by sector. Canada is largely financial, energy and materials, with all of that other stuff in between. By investing in Canadian retail stocks the Canadian investors can add some much-needed diversification. The Canadian retail stocks can also help investors profit during times of economic strength and certain types of retail stocks can offer a nice hedge against periods of slow growth or recessions.
While the concentrated Canadian stock market might be a disadvantage for those who own a stock market ETF or mutual fund, it might present an opportunity for investors who create their own stock portfolio. When we build our own stock portfolio we certainly do not need to follow the index weighting. We can build a more balanced portfolio.
Here’s the current sector breakdown for the Canadian market. The chart for the TSX Composite, ticker XIC, is courtesy of BlackRock Canada.
And when we build our portfolio we Canadians will largely shore up those sector holes by investing in US dividend growth stocks or perhaps a US dividend ETF or market ETF.
The Canadian retail stocks are mostly economically sensitive. Canadians need to be employed and with free cash flow to spend at these retail stores. They often depend on a healthy economy and economic growth.
Retail stocks will fall into two categories. First off there are consumer staples or defensives. As per the name they are staple items that we simply need in our daily lives. And then there are consumer discretionary companies. Those are items that are not necessities but that are a choice of how to personally allocate money for personal needs and wants.
As we know the Canadian Dividend Investor will often invest in Canadian banks and other financials as the bedrock of the portfolio. We might then turn our attention to Canadian energy stocks and investing in Canadian REITs as a wonderful source of income and portfolio diversification.
You’ll find more ideas in the our article for the best Canadian dividend stocks for 2021.
Some Wide Moat Retail Stocks
I am a big fan of investing in wide moat or moat stocks that suffer from very little competition. They might even be in an oligopoly situation such as the banks.
We also mentioned those moats when investing in Canadian railway stocks.
There’s nothing like a moat to help protect our earnings, free cash flow and dividend growth.
When it comes to investing in Canadian retail stocks we might build around the grocers. The space is dominated by a few players, so much so that it is oligopoly-like. Canadians mostly want to shop at a full service grocer. As an added benefit and layer of diversification, a few of the grocers also own the major pharmacy chains in Canada.
On that front we’ll start with Loblaws (L) that acquired Shoppers Drug Mart several years ago.
Metro (MRU) Metro is a leading food and pharmaceutical company that covers Quebec and Ontario. The brand names areMetro, Metro Plus, Super C, Food Basics, Adonis, and Premiere Moisson, as well as the pharmacies under the Jean Coutu, Brunet, Metro Pharmacy, and Food Basics Pharmacy names.
Empire (EMP.A) is a food conglomerate that operates Sobeys. Other brands and outlets include Safeway, IGA, Foodland, Farm Boy, FreshCo, Thrifty Foods and Lawtons Drug.
Another interesting add on in this space is The Northwest Company (NWC). The North West Company caters to the needs of underserved and rural communities in Northern Canada, Western Canada, rural Alaska, the South Pacific islands, and the Caribbean. You will gain some international diversification. It generates 75% of its revenue from food sales and the remainder from general merchandise and various offerings.
Fuel up with Alimentation Couche-Tard
Alimentation Couche-Tard (ATD.B) is an incredible Canadian success story. It is one of the most international of the popular Canadian dividends stocks. Here’s what they say on their website:
They also have significant presence in other regions around the globe. Couche-Tard are habitable acquirers that know how to bolt on acquisitions and feed that income and dividend stream.
The company is also a favourite of Mike at Dividend Stocks Rock, And you’ll find Couche-Tard in the Million Dollar Journey top Canadian dividend stocks. Here’s Mike at DSR with a quick video …
In the same space you might also look to Parkland Fuels (PKI) Parkland is a Canadian independent fuel retailing company based in Calgary, Alberta. Its subsidiaries include several gas station chains, including Pioneer, Fas Gas Plus and Ultramar.
Grab a Tims While You’re on the Road
Tim Hortons (QSR) is one of the most iconic brands and institutions in Canada. They cover every street corner across much of the country and they also have significant presence in the U.S. north east. They also have global expansion plans.
Tim Hortons is part of Restaurant Brands International. The stock offers an interesting opportunity as it is listed in Canada on the Toronto Stock Exchange, but it is more of a US focused company compared to Canadian. QSR (the ticker stands for Quick Serve Restaurant) also includes the very successful Popeyes and Burger King.
While Tim Hortons has weakened in recent years, it is still a strong brand with strong sales. Popeyes and Burger King have been ordering up the growth.
A recent quarterly report from April of 2021 offered:
System-wide sales growth was up 1.4% during the quarter, including a 1.8% gain for the Burger King business and 7.0% increase for Popeyes. The Timothy Hortons business saw a sales drop of 4.9% during the quarter.
A little bit of junk food might just hit the spot for the portfolio.
More Iconic Canadian Brands To Invest In
Most Canadians have a place in their heart for Canadian Tire (CTC.A). It is a wonderfully run business with a very strong brand. The company and stock has been surprisingly resilient over the years, they have been able to fend off competition from US and global players. It operates in the automotive, hardware, sports, leisure and housewares sectors. Its Canadian operations include: Canadian Tire, Mark’s, FGL Sports, PartSource, and the Canadian operations of Party City
You might also take a seat with Leons Furniture (LNF). The company has locations in every Province across Canada. This company has been a long-time (and surprising) Canadian success story. This company is like off of the radar for many Canadian dividend investors. It is currently cheap, and it offers a solid dividend. And it is known to throw the occasional special dividend at you.
Sleep Tight with ZZZ
You might also consider the iconic Sleep Country (ZZZ), great ticker by the way.
Sleep Country Canada Holdings Inc. is a Canadian mattress retailer, with over 260 stores operating in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island and Nova Scotia.
Those Loonies Can Add Up
Canada has its own low budget dollar store by way of Dollorama (DOL). They’ll feed your portfolio one loonie at a time.
Dollarama is a Canadian dollar store retail chain headquartered in Montreal. Since 2009, it is now Canada’s largest retailer of items for four dollars or less. Dollarama has over 1000 stores and has a presence in every province of Canada.
While Dollorama is currently on the expensive side, it has absolutely destroyed the TSX over the last decade and more. You might consider a position but look for periods of weakness in the stock as an opportunity.
Retail Stocks For Your Portfolio
As you might guess, there are a ton of other companies in this sector worth looking at. I can’t possibly mention all, but an honorable mention goes to the success story known as Canada Goose (GOOS) and Lululemon (LULU) in the clothing brand category.
If you want a much broader analysis and up to date top picks, sign up to the DSR newsletter for free, or subscribe to his premium service with our exclusive $100 discount using the promo code MDJGOPRO. You can also first read our detailed DSR review to get a better idea of the tremendous value this service can give you.
This post might help you realize that while Canadian retail does not get a lot of press, it is actually a very robust sector that has served investors well. Your portfolio could likely benefit by investing in Canadian retail stocks. It adds some wonderful layers and diversification.
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