If you want to diversify your portfolio, generate income, or grow your capital, dividend stocks may seem like a good option. But not all dividend stocks are worth your money.
Many of them lose value over time, especially if you spend the dividends instead of reinvesting them. That's why you need to double down on quality when selecting dividend stocks for your portfolio.
Two dividend-paying car manufacturers that tick the quality box are Ford Motor Company (F -1.92%) and Toyota Motor Corporation (TM 0.60%). Both companies have strong demand for their products, robust free cash flow, and attractive dividend yields.
Which one is a better choice for dividend investors? Let's take a look under the hood to find out.
Image source: Getty Images.
The case for Ford
Ford is an iconic American auto company that's transforming its business to focus on light trucks and electric vehicles (EVs). It offers an annualized yield of 4.82%, which is almost triple that of the average stock in the S&P 500.
The automaker also has a fairly low payout ratio of 39.2%, suggesting that its dividend should be sustainable. The company has also been doling out quarterly distributions to shareholders since 1956.
However, the auto company doesn't have a consistent track record of raising its core dividend. The regular quarterly payment dropped by 50% since the final period of 2000.
Ford's share price has also declined by 51% over the past 23 years, reflecting the fierce competition for market share from foreign-car makers over the past two decades. Meanwhile, the S&P 500 has increased by a staggering 332% over this period (not including dividends).
Now, Ford's prospects look better than they did at the turn of the century, thanks to the company's ongoing turnaround plan and emphasis on EVs. But it faces a highly competitive industry that's constantly innovating. The EV space is also going through some growing pains at the moment, which may impact returns in the near term.
The case for Toyota
Toyota is the leading car manufacturer in Japan. It produces vehicles that are known for their high quality and dependability, which makes them more valuable than many American cars in the resale market.
Toyota's American depositary shares (ADS) offer a higher-than-average dividend yield of 2.23%, and the company has an exceptionally low payout ratio of 22.1%. Its dividend thus screens as safe based on this metric. Toyota distributes dividends twice a year to shareholders.
The automaker has a history of increasing its dividend over time (see chart below), and management has recently stated that growing the dividend is a priority. Another advantage that Toyota has over some of its U.S. rivals is that it has lower costs for pension and retiree healthcare.
Its ADS have also generated gains of 130% over the prior 23 years, which far exceeds Ford's return on capital over this period. The only downside with this Japanese carmaker is that it's lagging in the EV market.
TM Dividends Paid (TTM) data by YCharts.
Verdict
Putting aside the possible tax implications of holding ADS, Toyota seems to be the better choice in this comparison. While Ford may have a slight edge in the EV market, Toyota is a well-known innovator with enormous financial resources.
It also has a much better history of increasing its dividend over time and generating positive returns for shareholders. Ford may change the situation in the future, but for now, Toyota has the upper hand.
