If your aim is to diversify your portfolio, generate income or grow your capital, dividend stocks may be appealing. However, not all dividend stocks are equal in terms of value and sustainability. Many of them lose value over time, especially if the dividends are spent rather than reinvested. This necessitates a cautious approach in selecting dividend stocks for your portfolio.
Two dividend-paying car manufacturers that stand out in terms of quality are Ford Motor Company (NYSE: F) and Toyota Motor Corporation (NYSE: TM). Both companies exhibit strong demand for their products, robust free cash flow, and attractive dividend yields. But which one is the better choice for dividend investors? Let’s dig deeper to find out.
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Analyzing Ford’s Dividend Potential
Ford, an iconic American auto company, is in the process of transforming its business to focus on light trucks and electric vehicles (EVs). It offers an annualized yield of 4.82%, nearly three times that of the average stock in the S&P 500. Ford also boasts a relatively low payout ratio of 39.2%, indicating that its dividend should be sustainable. The company has been distributing quarterly dividends to its shareholders since 1956.
However, Ford lacks a consistent track record of raising its core dividend, with the regular quarterly payment dropping by 50% since the final period of 2000. Ford’s share price has also declined by 51% over the past 23 years, reflecting intense competition for market share from foreign-car makers and the formidable 332% increase in the S&P 500 over the same period (excluding dividends).
Although Ford’s prospects have improved recently due to the company’s ongoing turnaround plan and emphasis on EVs, it operates in a highly competitive industry that is constantly evolving. The EV space is also experiencing some growing pains at the moment, which may affect returns in the near term.
Evaluating Toyota’s Dividend Strength
On the other hand, Toyota, the leading car manufacturer in Japan, is renowned for producing vehicles with a high quality and dependability, making them more valuable than many American cars in the resale market. Its American depositary shares (ADS) offer a higher-than-average dividend yield of 2.23%, and the company maintains an exceptionally low payout ratio of 22.1%, indicating a safe dividend. Toyota distributes dividends twice a year to its shareholders.
In addition, the automaker has a history of increasing its dividend over time and has recently emphasized that growing the dividend is a priority. Unlike some U.S. rivals, Toyota has lower costs for pension and retiree healthcare. Its ADS have also generated gains of 130% over the past 23 years, far exceeding Ford’s return on capital during the same period. However, the company lags behind in the EV market.
Verdict: The Better Dividend Stock
Setting aside the potential tax implications of holding ADS, Toyota appears to be the superior choice in this comparison. While Ford may have a slight edge in the EV market, Toyota is a well-known innovator with substantial financial resources, a history of dividend growth, and a track record of generating positive returns for its shareholders. Ford may change the situation in the future, but for now, Toyota has the upper hand.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.