Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Ford Dividend Holds Up When the Yield Curve Steepens
Transcript
- Lucas: Ford shares made a big move after hours yesterday — and for dividend investors, that's a signal worth unpacking. Luna: Ford is a name that comes up when people talk about high yield. What's happening there? Lucas: So Ford currently yields about 5 percent, which puts it in direct competition with bonds. And right now, the 10-year Treasury is at 4.65 percent — down a bit from last week, but still high. Meanwhile, the yield curve is steepening: the spread between the 10-year and the 2-year is now 35 basis points, up from 34 the day before. Luna: That steepening matters for dividend stocks because it changes the opportunity cost. If you can get 4.65 percent risk-free, why take equity risk for a 5 percent yield? Lucas: Exactly. And that's the question Ford has to answer. But here's the thing — Ford's dividend isn't just about yield. It's about free cash flow coverage. The company has been cutting costs aggressively — think layoffs, restructuring, and pivoting to AI in manufacturing. Just yesterday, we saw Visa announcing 7 percent job cuts for efficiency. Ford's been doing similar work. Luna: So the dividend is being supported by operational discipline, not just legacy cash flows. Lucas: Right. And that's a key theme in dividend investing right now — companies that are actively managing their cost structures to protect payouts. Ford's dividend was cut in 2020 during the pandemic, but since then they've raised it back and maintained it. Luna: That history is important. Once a company cuts, investors are always skeptical. Ford has to prove the payout is sustainable. Lucas: And so far, they have. The current annual dividend is 60 cents per share — and the payout ratio from free cash flow has been reasonable, around 30 to 40 percent depending on the quarter. That's a comfortable margin. Luna: But the yield curve steepening also signals expectations of either growth or inflation. How does Ford fit into that? Lucas: That's the tension. A steeper curve typically means the market expects stronger economic growth or higher inflation. For an automaker, growth is good — more car sales. But inflation raises input costs. Ford's advantage is that they've been investing in electric vehicles and software, which could improve margins over time. Luna: Still, 5 percent yield isn't huge. If the economy slows, could Ford cut again? Lucas: That's the risk. But look at the broader picture: the Fed has held rates flat at 3.63 percent, and the market is starting to price in a steadier environment. Dividend investors who are scared of cuts might prefer utilities or consumer staples. But Ford offers a mix of yield and cyclical upside that some find attractive. Luna: And if our money conversations have helped you think about a decision differently — maybe whether to buy Ford or something else — a couple of dollars a month is genuinely what keeps these going. If you've gotten something out of it, buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that makes a real difference. And it keeps the show ad-free, which we like. Luna: Alright, back to Ford. What should dividend investors watch next? Lucas: The key metric is free cash flow yield. Ford's current free cash flow is around $4 to $5 billion annually. The dividend costs about $2.4 billion. That's a coverage ratio of nearly 2 times. So even if earnings dip, there's a cushion. Luna: And that's better than some other high-yield names. Altria, for example, has a higher payout ratio. Lucas: Exactly. So the question isn't just yield — it's sustainability. And for Ford, the steepening curve actually helps if it reflects a stronger economy. But if the curve steepens because of fiscal deficits, that's a different story. Luna: True. The 30-year Treasury is at 5.12 percent, which is high. That could pull money out of equities if yields keep rising. Lucas: But right now, the curve is steepening from the short end — the 2-year yield actually fell slightly to 4.31 percent. That suggests the market expects rate cuts, not hikes. That's positive for dividend stocks. Luna: So the macro picture is supportive for now. But Ford also has company-specific risks: EV adoption, competition from Tesla and Chinese makers, and union costs. Lucas: All valid. But Ford's management has been clear — they want to maintain the dividend through the transition. And for income investors, that commitment matters. Luna: Would you buy Ford today for the dividend? Lucas: I wouldn't buy it solely for the dividend. But as part of a diversified income portfolio, with that 5 percent yield and a decent safety margin, it's a reasonable addition if you're okay with some cyclical volatility. Luna: And for those who want less risk, there are always the dividend ETFs like VYM or SCHD, which hold Ford among many others. Lucas: Right. VYM currently trades around 164, SCHD around 34. They offer diversification. But if you want to bet on Ford specifically, you need to do the homework on free cash flow and debt. Luna: Let's talk about debt. Ford has a lot of it — about $20 billion in auto debt. But their cash position is strong. Lucas: They had roughly $28 billion in cash and liquidity at last quarter. So net debt is manageable. And the dividend is paid from operating cash flow, not borrowings. That's key. Luna: So what's the takeaway for dividend investors in this rate environment? Lucas: The steepening curve doesn't automatically doom high-yield stocks. But it forces you to look beyond yield. Free cash flow coverage, debt levels, and management's commitment are more important than ever. Ford passes those tests, but it's not a set-and-forget. Luna: And if you're looking at other high-yield names, the same analysis applies. Companies like Visa are cutting jobs to protect margins, which could support their dividends too. Lucas: Exactly. So the theme is: efficiency and cash flow are the new dividend watchwords. Thanks for listening — and as always, keep an eye on that yield curve.