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3 Recession-Proof Dividend Stocks in the Auto Space to Count On

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The mounting shortage of semiconductors has left the auto sector in disarray since mid-2021. Just when industry watchdogs and auto giants were predicting the chip deficit to gradually start easing out from mid-2022, the Russia-Ukraine war triggered the second round of global microchip shortage. Automakers are now battling logistical challenges and high commodity and freight costs, which are weighing on their profits. And the supply-chain disruptions are likely to linger through the rest of the year and even into 2023.

The only bright spot for automakers currently is the rising average prices of vehicles amid the supply-demand mismatch. But rising sticker prices may soon prompt consumers to put these discretionary expenses on hold owing to recessionary fears. The automotive space is one of the most consumer cyclical sectors. With inflation at levels not seen in decades, the Fed has been forced to become more aggressive, cranking up borrowing rates. This monetary policy tightening, paired with geopolitical issues and supply chain bottlenecks, has created a challenging macroeconomic backdrop.

At the annual symposium to be held tomorrow, Fed Chairman Powell is expected to reaffirm his contractionary monetary policy with higher hikes going forward, which are likely to weaken the economy and result in a potential recession. Amid the prevailing weakness in the auto sector and the gloomy economic outlook, stock picking can be a risky game. In such a scenario, dividend investing could be one of the most effective approaches as investors seek consistent and safe income.

In this writeup, we highlight three dividend growth stocks — namely Genuine Parts Company (GPC - Free Report) , Cummins (CMI - Free Report) and Polaris (PII - Free Report) — that look poised to beat inflation and rise above any possible recession.

Dividend Investing is the Key

With uncertainty ruling the markets, dividend investing, in general, is one of the most popular investing themes. After all, who doesn’t like to receive a steady stream of income from their investments?

Stocks that have a strong dividend track belong to mature companies, are less susceptible to large swings in the market and act as a hedge against economic or political uncertainty as well as stock market volatility. These stocks possess superior fundamentals such as a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics that make them promising investments for the long term.

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 are higher. Therefore, companies that are witnessing consistent earnings growth generally make the best dividend stocks, with sustainable and increasing payouts.

In particular, focusing on the growth level in this strategy leads to higher returns. Dividend growth stocks also offer downside protection with their consistent increase in payouts. Stocks with a strong history of year-over-year dividend growth form a healthy portfolio, with a greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those with high yields.

Picking the Right Way

Targeting dividend stocks and combining them with a Zacks Rank of less than equal to #3 (Hold), along with a VGM Score of A or B will likely ensure a steady stream of cash to your portfolio. Using the Zacks Stocks Screener, we have ensured that the selected stocks have a dividend yield of more than 2%, with five-year historical dividend growth in excess of 0.1% and a payout ratio below 60%. 

Although these stocks do not necessarily have the highest yields, they have an impressive dividend track record. Based on the stocks’ prospects, their payout appears affordable and safe. We have ferreted out companies that have consistently increased their dividend payouts and are well-established with successful business operations. As such, they carry a lower level of risk, undoubtedly a major positive for investors in the current uncertain macro-environment.

3 Auto Stocks Suited for Income Investors

Genuine Parts: Atlanta-based Genuine Parts distributes automotive and industrial replacement parts and materials. This auto parts company has paid a cash dividend every year since going public in 1948. Genuine Parts approved a $3.58 per share annual dividend for 2022, representing its 66th consecutive annual increase in dividend. It is one of the lesser-known dividend aristocrats and pays out 46% of its profits as dividends, which is a fairly acceptable payout ratio. Currently, the dividend yield of the company is 2.28%. GPC had an annualized growth rate of 5.14% over the past five years. (Check Genuine Parts’ dividend history here).

Genuine Parts’ strategic buyouts to improve product offerings and expand its geographical footprint are commendable and are boosting its growth. The stock currently carries a Zacks Rank #3 and has a VGM Score of A. The Zacks Consensus Estimate for 2022 earnings per share implies year-over-year growth of 15.3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cummins: Headquartered in Indiana, Cummins is the largest engine producer in the world and maintains a diverse global footprint.In July 2022, Cummins raised its dividend for the 13th consecutive year. It pays a quarterly dividend of $1.57 a share ($6.28 annualized). Currently, the dividend yield of the company is 2.79%. CMI had an annualized growth rate of 7.52% over the past five years. Its payout ratio of 38 also looks quite sustainable on the back of solid prospects. (Check Cummins’ dividend history here).

The recent buyout of Meritor positions Cummins as a leading provider of integrated powertrain solutions across internal combustion and electric power applications. Cummins’ efforts to ramp up its capabilities in fuel cell and hydrogen production technology bode well for the long term. The stock currently carries a Zacks Rank #3 and has a VGM Score of B. The Zacks Consensus Estimate for 2022 earnings per share implies year-over-year growth of 15.3%.

Cummins Inc. Dividend Yield (TTM)

Cummins Inc. Dividend Yield (TTM)

Cummins Inc. dividend-yield-ttm | Cummins Inc. Quote

Polaris: Medina-based Polaris offers off-road vehicles, including all-terrain vehicles and side-by-side vehicles, among others. Two years ago, the company earned the status of a dividend aristocrat. Building on that legacy, Polaris hiked its regular quarterly dividend by 2% in January 2022, marking the 27th straight year of dividend increase. It pays a quarterly dividend of 64 cents a share ($2.56 annualized). Currently, the dividend yield of the company is 2.15%. PII had an annualized growth rate of 1.87% over the past five years. Its payout ratio of 33 also looks quite safe. (Check Polaris’ dividend history here).

Polaris possesses a strong balance sheet and its growth outlook looks promising amid increasing interest in outdoor recreation. The company’s long-term targets spark optimism. It envisions double-digit adjusted EPS growth, driven by robust sales, reduction in share count, and consistent tax rates. The stock currently carries a Zacks Rank #3 and has a VGM Score of B. The Zacks Consensus Estimate for 2022 earnings per share implies year-over-year growth of 10.8%.

Polaris Inc. Dividend Yield (TTM)

Polaris Inc. Dividend Yield (TTM)

Polaris Inc. dividend-yield-ttm | Polaris Inc. Quote

See More Zacks Research for These Tickers

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Genuine Parts Company (GPC) - free report >>

Cummins Inc. (CMI) - free report >>

Polaris Inc. (PII) - free report >>

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