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Should Investors Test Drive Ford?

Ford’s stock may appeal to more investors now that the company reinstated its dividend, but industry observers say betting on the auto industry still comes with plenty of risks.

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The move announced today to reinstate the dividend as of Jan 31 (after five years) is positive for investors because it signals that management is confident about the company’s prospects, says David Whiston, a stock analyst at Morningstar. The stock gets Morningstar’s highest rating (5 stars), and the research firm believes a fair value for the stock would be $23. It’s now trading at a little under $11.

Dividend-paying stocks are appealing for individual investors because over the long term they tend to outperform stocks that don’t pay dividends. What’s more, research has shown that over very long periods, investors actually earn most of their returns from dividend income.

That said, despite Ford’s impressive turnaround, Steven Roge, a portfolio manager with R.W. Roge & Company, says he’s still skeptical that there are enough excess returns in the auto industry to make any automaker a good long-term buy. “It’s not a business I would want to invest in for the next 30 years,” he says. “Ford stock might be a good trade, I just don’t think it’s a great investment,” he says.

Investors considering auto stocks should know they’re “viciously cyclical,” meaning they tend to fall hard in recessionary periods and then rebound strongly when the economy picks up, Whiston says. “For an individual investor the volatility can be hard to stomach. But for the patient investor who’s willing to ride out some ups and downs, you can make a lot of money,” he says. Right now, Ford’s stock (F) is cheap, and auto sales are starting to pick up from several years of lows, he says.

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