4 Safe Dividend Auto Stocks That Should Be On Your Watchlist

The auto sector, being consumer cyclical, is dependent on business cycles and economic conditions. While the U.S. economy is growing at a steady pace, many emerging economies like Brazil, India and China, among others, are witnessing a slowdown. This is weighing on the auto sector. Dwindling vehicle sales, fierce industry competition, trade tensions, mounting production, and R&D costs for a shift to electric and autonomous future are keeping margins under pressure for automakers.

Declining sales in China, which is the world’s largest auto market, is the key factor impacting the worldwide demand of car sales. Carmakers in China, which are battling an unprecedented slump amid economic slowdown concerns, are expected to witness a third straight annual drop in vehicle sales in 2020. Additionally, the coronavirus outbreak is likely to further dent China’s auto market. Tighter emission standards, increasing regulatory costs and soft market conditions are likely to impact European auto sales.

Dividend Investing in Focus

Amid the gloomy backdrop gripping the auto sector, stock picking is a risky game. With uncertainty ruling the markets, dividend investing, in general, is one of the most popular investing themes.

Investors love dividends and generally focus on dividend yield. As dividend yield is based on the stock’s price, lower share price indicates higher yield, making the stock attractive. Hence, before buying such a stock, one must ensure that it is not a dividend trap.

It is imperative to ensure that those payouts are affordable and sustainable. Dividends are usually paid out of a company’s’ profits. Hence, if a firm is paying more than what it earns, the chances of a dividend cut is higher. Therefore, companies that are witnessing consistent earnings growth generally make the best dividend stocks, with sustainable and increasing payouts.

Also, one must take into account the company’s debt levels. With significantly high level of global corporate debt, dividends might fall if corporates begin to conserve cash to service debt.

While there are several dividend stocks that could provide capital appreciation, honing in on stocks with a history of dividend growth leads to a healthy portfolio with greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those with high yields.

Stocks that have a strong history of dividend growth belong to mature companies that are less susceptible to large swings in the market, and thus act as a hedge against economic or political uncertainty as well as stock market volatility. At the same time, these offer downside protection with consistent increase in payouts.

Picking the Right Way

Targeting dividend stocks and combining them with a Zacks Rank of less than equal to #3 (Hold), along with VGM Scores of A or B will likely ensure a steady stream of cash to your portfolio. Additionally, the stocks have a strong history of dividend growth. They have been recording fairly conservative leverage and positive average annual earnings growth over the past five years.

Looking beyond the familiar dividend stocks in the auto industry like Ford Original post

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Written By: Zacks Investment Research