Owning stocks is one of the best ways to generate long-term wealth. What's even better is if the company pays you to own the stock, which is the idea of dividends. The higher the dividend yield, the more value investors receive. Let's dive into what makes Ford Motor Company (F 1.74%) a popular and no-brainer dividend stock, currently yielding over 4.6%.
The difference is astounding
One of the biggest investor gripes regarding the iconic Detroit automaker is that its stock has failed to live up to its potential in terms of a rising share price. That's certainly fair, and despite previous years of record profits, the stock price often seemed stuck in a rut.
But let's compare Ford's stock price to the S&P 500 over time, and then compare it when including reinvested dividends. The difference is eye-popping.
As you can see, when only judging Ford's returns by stock price, investors would be disappointed in gains compared to the broader S&P 500. However, look at the difference in Ford's returns over the same time frame when you add in reinvested dividends.
The power of reinvesting high-yield dividends alone makes Ford a no-brainer dividend stock for many investors, but there's more to what could make the automaker attractive to own.
Seeing clearly
In the past, many investors were turned off by the short-sighted management of Detroit automakers. That short-sighted vision came back to haunt Ford and General Motors as they laughed off the possibility of gas-guzzling SUVs and trucks losing popularity. Of course, those large vehicles did end up facing stiff competition from more fuel-efficient vehicles when gas prices rose, and it significantly hurt the automakers for years.
Fast forward to today, and Ford management isn't making those same mistakes. Ford has aggressively poured capital into its electric vehicle (EV) future. Just as importantly, its traditional gasoline-powered lineup is lucrative enough to fund the transition while maintaining its dividend payout.
The upside
In fact, Ford posted a 12% gain in second-quarter revenue compared to the prior year, while net income nearly tripled to $1.9 billion. Cash flow from operations and adjusted free cash flow checked in at a strong $5 billion and $2.9 billion, respectively, and Ford boasts nearly $30 billion of cash and over $47 billion in liquidity.
What this all means is that Ford's dividend is safe, barring an unforeseen pandemic or deep economic recession -- which, as we know, are possible.
Here are a couple of additional factors to consider. Ford has also focused on its more lucrative businesses with strategic moves such as exiting nearly all passenger car segments in the North American market, and exiting production in South America where it had burned over $12 billion.
Another factor is that Ford has a long history of special dividends. Take its most recent example as it cashed in on its early investment in Rivian, and then dished out a healthy $0.65 special dividend to investors.
The bottom line
After a strong second quarter, Ford raised its full-year guidance, and the automaker has plenty of resources to fund the transition to EVs while returning capital to shareholders. In fact, Ford is targeting 40% to 50% of adjusted free cash flow to be returned to shareholders. Even if the auto industry hits a significant speed bump causing a pause in the dividend, Ford's long-term goal is to keep its dividend healthy and as stable as possible.
Currently, Ford stock boasts a hefty 4.6% dividend, and when reinvested over time, the difference in value for investors makes it a no-brainer stock for passive income. Add the fact that the company is well-positioned to transition to the future of EVs; Ford expects its EV business to achieve 8% adjusted EBIT margins by 2026 -- indicating plenty of upside for investors.
