Does Ford's 4.8%-Yielding Dividend Make It a Top Income Stock?

Dividend stocks can be fantastic investments. That's abundantly clear from looking at their long-term returns. According to a study by Ned Davis Research and Hartford Funds, dividend-paying stocks in the S&P 500 have outperformed the index over the last 50 years. They've delivered a 9.2% average annual total return compared to a 7.7% average annual total return for an equal-weighted S&P 500 index.

Giant automaker Ford Motor Company (F 0.41%) is offering an above-average distribution right now -- at the current share price, it yields 4.8%, compared to an average of 1.5% for the S&P 500. Here's a look at whether that big-time payout makes Ford stock a top choice for investors seeking income and market-beating total return potential.

A sputtering payout

While dividend-paying stocks can be market-beating investments, there's a huge caveat. Dividend growth is the key to their outperformance:

Data source: Ned Davis Research and Hartford Funds. NOTE: Data from 1973-2022.

As that table shows, the best performances over the long haul have come from companies that grow their dividends. Meanwhile, companies that hold their payouts steady -- classified as "no change" -- somewhat underperformed the market, while those that cut or eliminated their payouts delivered negative returns on average.

Unfortunately, Ford has a rather lousy dividend track record. The company has eliminated its payout twice over the past two decades (from 2006 to 2012, and for a nearly two-year period following the outbreak of the pandemic). Given that sputtering track record, it's likely not a surprise to learn that Ford has followed an underperforming path.

F Total Return Level data by YCharts.

Can Ford shift its payout into a higher gear?

The potentially good news is that, as with any investment, Ford's past performance does not necessarily foreshadow its future results. So, while Ford has underperformed in the past, that doesn't mean history will repeat itself for either its payout or stock price.

Management has kept Ford's dividend on a growth trajectory since it reinstated the payout in late 2021. At the time, it reset its quarterly dividend to $0.10 per share (down from its pre-pandemic level of $0.14). It has since increased its quarterly payment twice (to $0.14 per share in mid-2022, and to $0.15 per share at the start of 2023). Ford also paid a special dividend of $0.65 per share early last year.

That payout could continue rising in the future. The automaker is investing heavily to drive future growth through its Ford+ strategy. The company is investing in developing electric vehicles (EVs) and software-enabled services like autonomous driving capabilities.

Ford is currently operating its EV business (Ford Model e) as a start-up. It's investing heavily in the business to build out its capabilities and capacity. However, like most start-ups, it's losing a lot of money. The segment reported a $1.3 billion loss before interest and taxes in the third quarter, and is on track to lose $4.5 billion in 2023. On the plus side, the unit is delivering accelerated revenue growth (sales were up 26% in the third quarter compared to 7% for the unit that houses its traditional gas-powered vehicles, Ford Blue). Meanwhile, management believes that Ford Model e will turn the corner to profitability by late 2026.

On the other hand, while the automaker has growth drivers in Ford Model e and its software-enabled services platform, profits from its legacy businesses could be under pressure due to higher labor costs. In November, the company signed a new long-term labor agreement with the United Auto Workers union following a series of strikes. The labor dispute impacted its earnings and cash flow in 2023. The company now forecasts that its adjusted free cash flow for the year will be between $5 billion and $5.5 billion, down from its initial outlook of between $6.5 billion and $7 billion.

Meanwhile, Ford anticipates the new labor deal will cost it an extra $8.8 billion through 2028. The company will work toward offsetting those costs through higher productivity and lower expenses. However, there's no guarantee it will be able to.

Too risky for a core income position

Over the years, Ford hasn't been a consistent dividend payer, let alone a grower. While the company is investing heavily to reaccelerate its revenue and earnings growth engines, it faces a challenging road ahead. Because of that, while its 4.8%-yielding payout looks enticing, it's not the best option for those seeking a steadily rising income stream and the potential of earning market-beating returns.