Why didn't Hitler invade Spain?
Why were Spain and Portugal neutral / not attacked in WWII?
You are looking at a few different questions.
1) Why didn't Franco voluntarily bring Spain to war in 1939-40?
a) Popular fatigue: The Spanish people were exposed to a bloody fratricidal war for three years. Remember, bombing non-military targets such as capitals from the air was a brand new military technique and was terrifying. Spain had just had an experience similar to the worst on the Western Front during World War I, and even twenty years later the people of France and Belgium had a visceral phobia of any repetition of the war. Apart from the Communist Party, even among Republicans who faced death or exile if they lost, there was little stomach to continue the war. Simply put, in three years Franco did not have the popular support to quickly win his war, and there was no chance that support would suddenly emerge to get Spain into the German foreign war.
b) Material elongation: Based on the point above. At the end of 1939 Spain was destroyed by three years of total war. Food shortages, disruption of commercial and industrial production, shortage of credit with the loss of gold reserves to support the currency ... Faced with the justification of the nationalists for their insurrection, the need to ensure stability and public order was, and they could hardly prolong the disturbance . The country needed a respite to rebuild. Germany was a willing trading partner (Spanish minerals were the only readily available source of components of several modern armaments, including armored armor and explosives), but neutrality allowed Spain to trade these desired resources with both Germany and Britain / America which were changing Circumstances of the war.
c) Beware of the war outlook. Again according to the changing circumstances of the war. In 1939 it was not clear that the Wehrmacht would dampen the French army so easily. Due to the circumstances, France had concentrated on a large civil army, Germany on a small elite (e.g. the prioritization of tanks, commandos, fighter jets - techniques that were politically unpopular or rejected by experts in France). In 1914 France had brought the German armed forces into a stalemate; In 1939, the French army was still considered the most respected and capable in Europe. It was precisely the rapid destruction of the French army that demonstrated the superiority of a small but technologically advanced army over the mobilization of large citizens; Until then, in the spring of 1940, it was not taken for granted that Germany was a "winner". Still, Britain repulsed the Air Force in the spring of 1940, and the US united in late 1941. For a cautious pragmatist like Franco, it was not clear throughout the war that joining Germany was the wise option. Instead, he sent a contingent of the most ardent Spanish anti-communists to fight the USSR - even then, it was a symbolic gesture to appease Hitler and a pragmatic domestic decision to get rid of the most radical fascists who could cause trouble for his internal new order than out of a sincere desire to be drawn into a foreign war.
2) Why did Portugal not take part in the war? Salazar was in a very precarious position. Portugal was a long-time British ally and was very vulnerable to British naval power (especially in relation to its colonies). One wrong move would jeopardize Portugal's independence - whether Britain conquered the Azores, Germany secured the Portuguese mines necessary for the war effort, or Spain took advantage of the confusion to restore control of Portugal. If anything, Salazar's neutrality was more sincere than Franco's, imposing an embargo on the activities of both sides in Portuguese territory and forbidding Portuguese citizens from helping one or the other. This enabled him to play the changing circumstances of the war to his advantage and look the other way when the US later called for the Azores to be used at sea later in the war, while remaining officially neutral to avoid German backlash.
3) Why didn't Hitler invade Spain? Hitler had spent three years observing the ineffectiveness of the nationalists' military prowess and expressing their frustration, both in terms of their military strength and poor leadership. Often the German Condor Legion had to act as a spearhead for Franco and not as the technical adviser they were intended for (e.g. in Guernica). Germany already had a useless ally who overwhelmed its resources and fronts in catastrophic Balkan wars. It was already facing the defense of a huge Atlantic coast from Denmark to the Pyrenees and did not need to expand its exposed borders any further. Such an expansion of the German flank was particularly not worth the cost of the material "sweeteners" demanded by Franco, as he knew that they would sabotage the arrangement (colonies, food and fuel). Furthermore, the only thing Germany really wanted from Spain in 1936 was access to bases in Morocco, no longer necessary after Pétain put the French Empire on the Axis. All in all, Franco's neutrality was enough to preserve Germany's western flank while it contained Britain and focused on its real enemy, the USSR.
4) Why did the UK not invade Spain? This has been answered pretty well above and focuses on the threat to the UK Mediterranean supply lines across the Strait of Gibraltar. Although it should be noted that the Allies later spread disinformation, claiming they wanted to land in Spain as a distraction from the Normandy landings.
So at the end of the day we shouldn't be surprised. The dictators of Spain and Portugal remained neutral towards the liberal democracies of Switzerland and Ireland: In international affairs, domestic constraints / challenges often trump ideological affinity.
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