Legacy automakers had to deal with a raft of issues in 2023. In addition to the colossal task of figuring out how to build literal "data centers on wheels," electric vehicle (EV) pioneer Tesla (TSLA +3.01%) hastened on a price war. Faced with mounting losses on EV production, rising wages for auto union workers, and higher interest rates pressuring consumers' appetite for new vehicle purchases, automakers tapped the brakes on rolling out new electrified models.
Ford (F +3.54%) weathered the storm, though, and actually managed to crank out a total return (which includes reinvested dividends) of nearly 16% in 2023. Shares still appear cheap at just under 8 times trailing 12-month earnings per share.
NYSE: F
Key Data Points
But a repeat of that performance in the new year is another question entirely. For investors looking for long-term dividend stocks, Ford may appear tempting at the start of 2024. Before piling in, there's another investment worth serious consideration first.
A better buy than Ford?
Before buying any stock where the dividend payment is expected to provide most of the return, investors should compare the annual dividend yield to what can be had investing in bonds -- an investment in debt that yields the holder interest income.
And after the U.S. Federal Reserve ratcheted up its short-term interest rate from near-zero to upwards of 5.5% over the last couple of years, bonds are doling out healthy interest income once again.
The Vanguard Total Bond Market ETF (BND +0.39%) -- which is diversified across thousands of bond holdings in U.S. government agency debt and high-quality corporate debt -- is now yielding just over 4.3% a year as of this writing. That's not much less than the 4.9% dividend yield Ford stock is touting at the moment.
Alternatively, for those who are interested in higher yield and who will accept higher volatility, there's the iShares iBoxx $ High Yield Corporate Bond ETF (HYG +0.37%) -- invested primarily in short- to medium-term "junk bonds," or debt of companies rated below investment grade by credit rating agencies. The iShares ETF currently yields 7.3%.
The real question for investors at this juncture is whether that Ford dividend is worth betting on, because business growth and profitability may be lumpy at best for the automaker in the decade ahead as it transitions to a new era of software-defined vehicles. Bonds may actually provide a similar, if not better, investment return for lower risk -- much as they did over the last decade.
Data by YCharts.
Mind the risks before investing in high-yield stocks and bonds
Granted, before you plow hard-earned money into Ford stock or a bond ETF, I believe in Warren Buffett's preference toward high-quality stocks over everything else. For investors who want to own a piece of a business that is growing its profitability at healthy rates for the long term (for years, and the more the better), the data says there's no beating stock ownership.
Of course, the trade-off is higher volatility when investing in stocks -- a fact that not even dividends (Ford's or otherwise) can offset.
Nevertheless, Ford has struggled to sustain growth over the last couple of decades, and that trend is showing no sign of letting up. It's a critical period of time for legacy automakers as technology disrupts the way cars have been built in the past. Before investing in that cheap-looking Ford stock with its high dividend yield, I'd consider a bond fund like the Vanguard Total Bond Market ETF first if long-term stock ownership really isn't possible.
