Ford's 4.2% dividend yield masks a hidden risk

Ford Motor Company (F) wrapped up 2025 with impressive gains. The Detroit automaker saw its shares climb 33%, outpacing Tesla's performance by a significant margin for the year.

Market sentiment shifted dramatically for the maker of America's bestselling vehicle, the F-Series pickup truck. 

However, before investors get too excited about Ford's dividend yield, which currently stands at 4.20%, or the stock's strong momentum, there are some essential details worth understanding.

Ford's business faces structural headwinds

Companies with recurring revenue streams tend to make the best long-term investments. They sell products that drive repeat purchases, which adds stability.

Ford doesn't fit that profile. Cars are expensive purchases that households make infrequently. They're also highly cyclical, meaning that when the economy slows, consumers delay buying new vehicles to save money.

Interest rates, unemployment, inflation, and gas prices all have an impact on auto sales. The automaker's operations also include massive expenses and capital expenditures for its labor force, supplies, factories, warranties, and research and development.

Cutting back in any of these areas is risky, as Ford won't be able to keep up with competitors who have deep pockets. As a result, Ford stock has struggled to beat the broader markets over the past two decades. 

Moreover, its operating margin has declined to less than 2% in the last 12 months, compared to 4% in 2022, according to data from Fiscal.ai. 

Ford also struggles to forecast industry changes accurately. It recently announced $19.5 billion in special charges related to restructuring its business and scaling back electric vehicle operations.

This is a costly mistake that shareholders shouldn't overlook. Even EV market experts overestimated how quickly the auto industry would transition to sustainable vehicles. The miscalculation points to limited growth opportunities in the auto sector, which naturally caps potential gains in revenue and profit.

These challenges help explain why Ford shares have drastically underperformed the market over the past decade. The stock has generated a total return of 92%, well below the S&P 500's 326%, according to data from Y-charts.

No clear catalysts suggest the next 10 years will be different. As a result, I think Ford will likely continue to have a subpar track record of compounding shareholder capital.

The dividend offers income but comes with real risks

Ford might appeal to value investors seeking businesses trading at attractive valuations. The auto stock currently has a forward price-to-earnings ratio of 12.2x, according to data from Tikr.com. Compared to the S&P 500's multiple of 22.4x, this represents a significant discount.

But Ford will never deserve a valuation in line with the broader index, given the market understands this is a mature, extremely cyclical industry. 

Ford stock pays a dividend yield of 4.20%, with a quarterly payout of $0.15. This might look compelling for income investors, but even the dividend isn't totally safe.

Related: 2 Top Dividend Stocks I'd Own Over the Next Decade

For instance, the automaker rolled back its dividends during the Great Financial Crash in 2008 and even during the COVID-19 pandemic in 2020, according to data from Fiscal.ai. 

In an economic downturn, demand for Ford vehicles will be under pressure. That hurts sales and profits. Management could pause the dividend to conserve cash during tough times.

Given an annual dividend expense of roughly $2.38 billion and Ford's estimated free cash flow of $1.9 billion in 2025, the payout ratio is well over 100%. Notably, Ford's FCF is projected to improve to $3.9 billion in 2026, lowering the payout ratio to 61%.

Ford's dividend might not increase much going forward. The company has temporarily halted payments in the past, and there's a real risk that it will do so again at some point.

In my mind, this makes owning Ford for the dividend yield risky long-term.

Recent restructuring reveals bigger strategic challenges

Ford made major changes to its business plans in recent months. The company is refocusing investments on hybrid vehicles, including plug-in models, rather than pure EVs.

It's also canceling the next generation of large all-electric trucks in exchange for smaller, more affordable EVs.

CEO Jim Farley told CNBC that the company evaluated the market and decided to follow customers where the market is today, not where people thought it would be.

The EV segment experienced a sales slump after the Trump administration ended a $7,500 federal tax credit for EV buyers in September. Farley acknowledged that policy changes played a role in Ford's decision, though they weren't the only reason.

In a CNBC interview Farley emphasized:

Ford's all-electric F-150 Lightning pickup will transition to an extended-range EV that includes an electric powertrain and a gas-powered generator. The company also announced plans to use battery plants in Kentucky and Michigan for a new stationary energy storage business.

Ford Pro business remains a bright spot worth watching

The company's commercial and fleet business, Ford Pro, remains a competitive advantage.

• Ford has the broadest commercial vehicle portfolio of any automaker, centered on its van, truck, and Super Duty business.
• The business is evenly spread across channels, with about one-third from large corporations, one-third from small companies, and one-third from government and rental customers. This diversification helps reduce risk.
• Ford Pro delivered third-quarter EBIT results of nearly $2 billion, up $172 million from a year earlier.
• The division benefits from a strong service infrastructure, with dealers investing over $2 billion to focus on customer uptime.
• Ford now has almost 5,000 mobile service vans that go directly to customers. This is a structural advantage that's difficult for competitors to replicate.

The Pro business also sees strong software adoption. Ford has 818,000 paid subscribers, and customers who subscribe to Ford Pro Intelligence have a parts attach rate that's 20 points higher than those who don't.

Services now represent a growing percentage of Ford Pro's total EBIT, making it a more durable business even when vehicle sales face cyclical pressures.

Near-term challenges could weigh on results

Ford lowered its 2025 guidance due to a supplier fire at aluminum supplier Novelis. The fire is expected to cost between $1.5 billion and $2 billion, though Ford expects to mitigate much of that impact.

The company announced plans to add 1,000 workers early next year to plants that produce F-Series trucks in Michigan and Kentucky. The additional production should recoup about half of the 100,000 units Ford expects to lose this year due to the fire.

Ford also faces ongoing net tariff costs of roughly $1 billion, which the company is now baking into its business plan as a cost of doing business. Management lowered expected tariff costs by $1 billion due to changes by the Trump administration, including exemptions and extended tariff offsets on American-made vehicles.

Despite these near-term headwinds, Ford's underlying business showed strength in the third quarter. The company beatWall Street's earnings expectations with adjusted earnings before interest and taxes of $2.6 billion.

CFO Sherry House said without the supplier fire, Ford was planning to raise its 2025 guidance to more than $8 billion in adjusted EBIT rather than cutting it.

Even though shares are trading below $15 and the dividend yield looks attractive at first glance, investors should approach Ford stock with caution. 

The structural challenges facing the auto industry and Ford's track record of capital allocation missteps suggest better opportunities likely exist elsewhere for long-term investors.

Related: Ford debuts plan to leapfrog key Tesla tech