Ride Out the Auto Bubble With These Dividend Stocks

The glory days for the auto industry might be coming to an end.

So soon?auto bubble

I know, it seems like just yesterday that General Motors (NYSE: GM) was getting bailed out by the U.S. government. But the auto industry managed a nice rebound from the financial crisis and set a record for annual auto sales last year.

Yet, May auto sales were a big disappointment and could be signaling a shift in the auto cycle. All the major automakers missed expectations on U.S. auto sales, which is especially troubling given that Memorial Day is generally a major weekend for car sales.

GM saw U.S. sales of its autos fall 18% for the month of May, compared to the same period last year. Toyota Motor Corp. (NYSE: TM) saw a 10% fall and Ford (NYSE: F) saw a 6% decline.

Ford estimated that industry-wide U.S. auto sales fell 8% in May. Even Jamie Dimon, the CEO of JPMorgan Chase (NYSE: JPM), has chimed in on autos.

Speaking about auto loans, Dimon notes that, “Auto is clearly a little stretched, in my opinion.” This comes as the average size of loans is on the rise and now sits near record highs at $30,000. Last month, the total amount of auto loans hit a record high $1 trillion. If the auto loan market starts to dry up, that will further exacerbate a slowdown in car sales.

The key for investors in the auto industry is that regardless of what happens to new car sales, there are already a large number of cars on the road that will need to be serviced. Plus, the number of miles driven is on the rise (thanks in part to low gas prices), which will only boost the frequency of servicing and the need to buy replacement and repair parts.

Instead of focusing on car makers, there are a number of other companies in the auto industry that should still be great stocks to own, even if we have seen peak auto sales. As an added bonus, the following three ways to play the auto bubble also offer solid dividends.

No. 1 Auto Bubble Play: Genuine Parts Co. (NYSE: GPC)

Genuine Parts made my list of top five dividend achievers in 2015 – which includes stocks that have upped their dividends for at least 50 straight years. Since then, the return for Genuine Parts’ stock has been double the S&P 500. However, there should still more upside.

Genuine is offering a 2.7% dividend yield and caters to the auto industry as an auto parts distributor. In particular, it operates the NAPA Auto Parts stores. With over 1,000 NAPA stores, it has a large distribution network (and delivery network using its own trucks for same-day delivery) that it leverages to not only cater to the individual customer, but also businesses like repair shops.

No. 2 Auto Bubble Play: Snap-on Inc. (NYSE: SNA)

Snap-on is one of those stocks that will be immune to a potential interest rate increase from the Federal Reserve – and could actually benefit from another rate hike. The company is a small-tools maker that offers a 1.5% dividend yield.

Snap-on has growth levers it can pull to boost the bottom line regardless of the economic environment. The reason it’s a great auto industry play is that its tools are primarily used by auto repair shops. As more miles are driven and the average age of cars goes up, there will be more car-repair servicing to be done. Snap-on also manufactures most of the tools it sells (around three-quarters) while its top competitor Mac Tools only makes half of its tools.

Snap-on is also looking to tap into higher-margin businesses like providing diagnostics software and computing tools.

No. 3 Auto Bubble Play: Penske Automotive Group (NYSE: PAG)

Penske is too cheap to ignore when it comes to auto retailers.

Auto dealers get revenues from auto sales, including used cars, but also collect high-margin profits from selling parts and repairs. The beauty of Penske is that it operates in a rather insulated market, where customers are more likely to keep spending regardless of the economic backdrop. Penske caters to the higher-end market and focuses on selling and repairing luxury and premium cars.

Penske also offers a 2.9% dividend yield and trades at less than 10 times earnings, while larger peers like CarMax (NYSE: KMX) and Group 1 Auto (NYSE: GPI) trade at over 15 times.

If you’re still looking to play the auto industry, it might be worthwhile to hold off on investing in the automakers. Rather, take a look at the underrated players in the industry that not only offer dividends but will also benefit from continued driving.

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Published by Wyatt Investment Research at