I want to warn you to avoid a common investment trap I fell into recently — Don’t chase yield.
Yield is the percentage of a stock’s price you should get from current dividends. A stock priced at $100 per share and delivering $1 per year in dividends has a yield of 1%.
Income investors are tempted by high yields, but they are often high because the value of the underlying stock is falling. Many investors learned that lesson the hard way with General Electric (NYSE:GE), which has since cut its dividend and may now end it.
I am learning it with Ford Motor (NYSE:F). And not even today’s post-earnings pop is helping.
Ford Stock Has Been a Rough Investment
I bought Ford stock shortly before Jim Hackett was hired as CEO. He came from Steelcase (NYSE:SCS), the maker of metal furniture that he made a fixture in Silicon Valley. The hope was he could turn Ford around by doing deals with technology companies.
At the time, the shares traded at about $11, and the 60-cent-per-share annualized dividend represented a yield of 5.45%. Sweet, I thought. Today the shares opened for trade Oct. 25 at $8.18. That made the yield 7.3%, though the price surge after the open pushed it down to about 6.8%. Hackett says he’s committed to that dividend, and the company’s 29-cents-per-share of earnings supports it.
Ford insists it will earn at least $1.30 per share for the year. It can afford that dividend. But the stock is down by nearly one-third from where I bought it. This loss doesn’t compensate for that dividend.
Ford has launched a new ad campaign called “Built Ford Proud,” starring Breaking Bad star Bryan Cranston. Excuse analysts if they think Cranston is still selling meth.
While technologists are looking for simple machines they can upgrade with self-driving hardware and software, Ford is all but abandoning passenger cars in favor of gas guzzling pick-up trucks and sport utility vehicles. While European companies are abandoning diesel engines, Ford is doubling down.
Begging to Be Bought?
The fact is that, at a market cap of $35 billion, Ford stock today would be seat cushion money for Apple (NASDAQ:AAPL) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), both of which have self-driving car tech and both of which need production capabilities to exploit it. Instead Hackett, who came to Ford with a reputation for being able to deal with the valley, is thumbing his nose at it.
That’s why analysts have been shying away from Ford, even though its valuation is now over 30% below that of Tesla (NASDAQ:TSLA), and even though Ford’s quarterly sales of $37.6 billion dwarf the $20.5 billion Tesla is expected to bring in all year.
They just don’t see a future in Ford stock.
The Bottom Line
You can argue all day that a company turning a profit on quarterly sales of $37.6 billion should be worth more than one that’s breaking even with annual sales of $20.5 billion.
Arguments aren’t what sell stock. Having buyers is what sells stock.
Just not enough buyers are buying into Hackett’s plan to “turn around” Ford results or his promises to “make Detroit great again,” buying a huge train station that’s currently a haunted house. Even today’s spike over $8.70 hasn’t brought Ford stock anywhere near the $11 area.
I considered this a great buying opportunity about two years ago, a great chance to get guaranteed income in troubled times. So far, I’ve been wrong. I’ve got my dividends, but the stock underlying those dividends is worth much less than it was.
Learn from my mistake. Don’t let the promise of income lead you to parting with your principal in a stock nobody wants.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in F.