Buying Ford For The Dividend? Consider This Instead

Dec.12.11 | About: Ford Motor (F)

Ford (NYSE:F) recently announced that it would be paying a quarterly divided of 5 cents a share. This news helped boost shares of Ford, but in reality, the dividend is very small. The dividend will amount to 20 cents a share per year, or 1.8%. While better than nothing, this dividend is not big enough to entice dividend investors.

If you are interested in dividends, then the better buy is the Ford preferred (F.PA). F.PA is currently yielding just over 7%. If the company can afford to start paying a dividend on the common stock, then preferred shareholders are in a very good place. The company is in a strong financial position and will be able to make payments on the preferred shares. Evidence for Ford's strong financial position lies is its nine consecutive profitable quarters. Also, Ford has over 4 dollars a share in cash on hand. While Ford does have a significant amount of debt, the large cash position means the company is not at risk for a funding crisis.

An investment in Ford common stock represents a bet on a stronger global economy. Ford does a lot of business in Europe, so an investment in Ford common stock is a major bet on Europe. If Europe falls apart, then earnings will go down significantly, driving the stock down too. The preferred shares are a more of a bet on the health of Ford the company, not the global economy. If the global economy gets bad enough, then Ford preferred shares are at risk, but a slowdown in growth will not hurt the preferred stock. The chart below shows Ford common stock (orange) vs. Ford preferred stock (blue) over the past year.

Click to enlarge

(Source: cnbc)

While shares of Ford common stock have gone down significantly due to weakness in the global economy, Ford preferred shares have done well because Ford the company is very healthy.

The bottom line is that if you are buying Ford for the dividend, you should be buying Ford preferred (F.PA) instead. If you want to bet on a stronger global economy including Europe, then Ford's common stock is the better buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.