2 Automotive Dividends to Buy and 1 to Avoid

These aren't your daddy's automotive stocks.

It's been nearly five years since Ford (NYSE: F  ) last paid out a quarterly dividend, while General Motors (NYSE: GM  ) hasn't paid out a dividend since early 2008, which is well before its bankruptcy and subsequent reorganization. The once-dominant names in American automotive engineering have been reduced to white noise for dividend-seeking investors, begging the question: What's a dividend seeking investor to do?

For starters, rather than driving yourself crazy searching for dividend income from a small scope of well-known names, widen your search and you could be surprised by some previously unknown companies. Considering all aspects of automotive production, not just the final product (the car), two names stand out with a strong history of uninterrupted dividend growth. On the other hand, a longtime dividend payer in this sector could have you hitting the brakes.

Johnson Controls (NYSE: JCI  ) -- trust it
Johnson Controls is more like a conglomerate than merely an auto parts company. The company operates out of three segments: building efficiency, automotive experience, and power solutions. The building efficiency segment designs and installs heating, ventilation, and air-conditioning systems. The more known automotive division and power solutions segment are responsible for everything from instrument panels to lead-acid batteries. The company even offers green solutions by manufacturing lithium-ion batteries for electric vehicles.

Johnson Controls wasn't immune to the industrywide downturn in 2009, but it's about as steady a growth stock as you can get in the automotive parts sector. Competing against Magna International (NYSE: MGA  ) and Exide Technologies (Nasdaq: XIDE  ) , Johnson Controls sports the highest five-year growth projections of the three. Johnson has a manageable debt to equity of 40% and a highly sustainable payout ratio of 23%, which leaves plenty of room for that dividend to keep moving higher.

Investors aren't exactly burning rubber to get their hands on Johnson's current 1.6% yield. But considering that the company's dividend was not interrupted like many of its counterparts during the recession, and that the dividend has grown at an annual rate of 10.4% over the past five years -- they should be. Johnson has its tentacles in many different aspects of the automotive industry, and that's a recipe for success.

Polaris Industries (NYSE: PII  ) -- trust it
Keep in mind, the automotive sector also includes motorcycles, all-terrain vehicles, and snowmobiles, which just so happen to be Polaris Industries' specialty. You'd think with consumers still spending cautiously that discretionary items like ATVs and snowmobiles wouldn't exactly be flying off the shelves -- but this isn't the case.

Polaris has an impeccable record of smashing analyst profit estimates lately. In fact, the company has handily surpassed earnings estimates for 18 consecutive quarters and could make it 19 later this week.

Fueling the charge has been consumer acceptance of new products and the company's ability to pass along rising material prices to consumers. More importantly, Polaris is looking to use its strong cash position to grow through acquisitions, such as it did with its purchase of Indian Motorcycle, the producer of the first motorcycle in the United States. Gaining significant market share in ATVs and motorcycles, Polaris' run may be just beginning.

What's constant with a company like Polaris is the strength of its dividend. Since 1996, the company's dividend has grown at an annual rate of 12.3%-a phenomenal figure considering the near-Armageddon the sector went through over the past few years. Like Johnson Controls, most stalwart income seekers might overlook Polaris' 1.6% yield, but considering its rapid growth over the past 15 years and its growing motorcycle and ATV market share, you simply can't afford to ignore this company anymore.

Federal Signal (NYSE: FSS  ) -- avoid it
That sucking sound you hear is not only from Federal Signal's line of street cleaner and vacuum loader trucks that it produces, but also from the dividend literally being swept right out from under shareholders feet.

Due to a large impairment charge in the fourth quarter and weaker than anticipated orders from its fire rescue business, the company, which has been steadily profitable for years, has reported two consecutive quarterly losses. Federal Signal has now missed consensus estimates for the past five quarters.

Even worse, recently imposed restrictions from the company's lenders required the company to not pay a dividend to shareholders for the first time in 23 years. Sporting $242 million in debt and a debt to equity of 108%, it's no surprise that the company's lenders aren't willing to take the risk of it paying out profits that simply aren't there right now. Relying heavily of government and municipal orders puts the company's product line at serious risk -- especially now when most municipalities are curbing their spending. While profitability could be just around the corner according to analyst forecasts, it's very unlikely the company will be able to reinstate its dividend anytime soon. My advice would be to take notice of this flashing red light and avoid this stock.

Foolish roundup
The automotive sector is yet another case where looking at the dividend yield was not enough to give us the full picture. A yield of 1.6% might not be enough to excite most flash-in-the-pan investors, but digging deeper and discovering that these dividends have grown at a double-digit annual rate make them intriguing opportunities for a true dividend-seeking investor looking for a stable investment.

What automotive companies have you putting the pedal to the metal? Share your wisdom with the community in the comments section below. Consider adding Johnson Controls, Polaris Industries, and Federal Signal to your watchlist to keep up on the latest news within the automotive sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that changes its oil every 3,000 miles.


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