When investors look for dividend stocks, many search for yields above 3%. And that's a fine strategy but it leaves out many companies with bright futures, and solid dividends, that can build on their current yield. That's exactly the case with these two businesses: Goodyear Tire & Rubber (NASDAQ: GT) and, until its name changes soon, Delphi Automotive (NYSE: DLPH).
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Many of us drive every day, yet few of us think of tires when it comes to investing. Evolving tire trends could benefit Goodyear's business in the near future. For example, consumer tires have become larger (Goodyear's definition of this category includes tires larger than 17 inches in diameter). Since larger tires have higher margins and the trend suggests tires will become even larger, margins should get a short- and medium-term boost.
A second, long-term trend arises from the automotive industry's drive to autonomous vehicles, as well as the popularity of ridesharing companies such as Uber and Lyft. As more people put off buying a car and opt to share rides, larger companies should amass vehicle fleets. While that could put some pricing pressure on Goodyear, as larger companies placing larger orders will have more bargaining power than retail customers, the effect should be more than offset by the company's ability to cut shipping costs to retail stores and reduced spending on advertising tires to individual consumers. And a large, established company such as Goodyear could attract more of these massive customers.
Another reason Goodyear is often overlooked as a dividend stock is because it reinstated its dividend only a few years ago, in 2013. But management has shown a clear commitment to growing its dividend: Goodyear announced just this week it would increase its dividend 40% to $0.14 per share, for a yield of about 1.7%. If margins improve as larger tires gain market share, the yield should continue to grow.
Hands off the wheel
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Investors interested in rapidly advancing driverless-vehicle technology probably weren't looking at Delphi, a parts supplier for the automotive industry. That changed rather quickly when Delphi announced it would spin off its internal-combustion powertrain business, which will begin trading publicly in 2018 as Delphi Technologies. The remaining company will trade under a new name, Aptiv, and will focus on electric vehicle and autonomous-driving technology.
It's a brilliant move that will help separate Delphi's more lucrative self-driving products from the rest of its business. It will also do one very important thing for investors: enable the stock to trade at a valuation closer to technology companies rather than typical auto-parts suppliers. As the company becomes a contender in self-driving-vehicle technology -- it's already in partnerships with BMW (NASDAQOTH: BAMXF) and Intel (NASDAQ: INTC), among others -- and its margins improve accordingly, expect the market to reward the stock with a higher multiple.
Simply put, Delphi is becoming less of a traditional Detroit automotive-parts supplier and more of a Silicon Valley technology developer. It even raised guidance recently to reflect the improvement in its core business. And while the stock is a long-term play -- investors need to wait for autonomous-vehicle technology to advance and become a sizable part of our transportation framework -- Delphi remains a sneaky smart dividend stock as its yield of 1.17% won't be picked up by many stock screeners.
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