There's something magical about dividends.
I'm not just talking about the income stream that they create.
Nor am I referring to the compounding effect they have on your portfolio when reinvested time and time again.
Right now, I'm specifically talking about how incredibly attractive dividend-paying companies become when the market sours.
Somehow, the S&P/ASX 200 (ASX: XJO) ended last week with a modest gain. That was despite Monday's 4.1 per cent bloodbath – the most violent selloff in recent memory.
Unfortunately, it wasn't so lucky for the month.
In fact, the bourse suffered its worst month since October 2008, which coincided with the depths of the Global Financial Crisis, plunging 8.6 per cent.
But while there were plenty of headlines glorifying the damage, with some declaring 'The End of Australia' and the pending 'Global Financial Crisis 2.0', I'd like to offer a more refreshing take on the situation…
The market crash was actually a blessing in disguise.
Okay, so it mightn't have felt like it at the time. After all, no one enjoys losing money.
But now, high-quality companies are trading at levels not seen since December 2014.
The ASX is down almost 14 per cent since April and long-term dividend investors will be licking their lips at the opportunities suddenly on offer.
You see, dividend yields move in the opposite direction to share prices.
They're inversely correlated, so when the share price falls, the dividend yield rises (all other things being equal).
This means that the market's crash over the last month has had a very positive effect on the dividend yields offered by some of Australia's greatest companies.
Let's take a brief look at BHP Billiton Limited (ASX: BHP) as a perfect example.
The miner's shares have plunged in value recently, meaning they're cheaper for you to buy. At the same time, the miner has increased its dividend per share, improving the yield.
Believe it or not, BHP's shares are now yielding 6.9 per cent, fully franked. When tax credits are included, that's a 9.9 per cent dividend yield!
Commonwealth Bank of Australia (ASX: CBA) offers a similar story. The country's biggest bank has fallen more than 20 per cent since March and is paying a 5.6 per cent fully franked dividend yield, or 8 per cent gross.
By comparison, you'd be lucky to get a 3 per cent return from the average term deposit in this low interest rate environment.
Speaking of which, the Reserve Bank of Australia will meet this afternoon.
All 25 economists polled by Reuters expect the RBA to keep interest rates on hold at 2 per cent.
I'm not betting against them, even despite last week's global economic turmoil.
Instead, the Board will likely wait to see how things pan out in China. And they'll likely wait to see if the Federal Reserve acts to hike US interest rates at their September meeting.
But I am confident on one thing: Interest rates are staying lower for longer.
I also wouldn't be surprised if the RBA cuts interest rates before the year is out. Citi agrees, forecasting the RBA will cut the cash rate to just 1.75 per cent at their November meeting.
All of which makes investing in high-yield dividend companies virtually a no-brainer decision… especially when you look at how expensive property has become, and the poor returns on offer from term deposits.
Before we get too carried away however, income investing isn't about buying all the stocks with the highest yields.
For instance, you won't find either BHP Billiton or Commonwealth Bank in the list of Motley Fool Dividend Investor recommended companies.
Why? Because neither are looking particularly attractive right now.
BHP Billiton might offer a solid yield, but mining is a capital intensive business plus the company is also dealing with plunging commodity prices.
Likewise, the banks are facing stiff competition and tougher regulations making earnings and dividend growth increasingly difficult.
Put simply, Andrew Page, lead advisor for the Motley Fool Dividend Investor newsletter, believes there are far better income opportunities right now.
Andrew doesn't just look for companies paying attractive dividends. He's also looking for companies with real growth prospects, with strong balance sheets, good cash generation capacity, and low capital requirements.
It's that very process that saw Andrew recommend Australian Pharmaceutical Industries (ASX: API).
Motley Fool Dividend Investor subscribers who followed his advice would now be sitting on a capital gain of over 90%.
It gets even better — API increased its most recent dividend payment by a whopping 33 per cent, fully franked!
Just in case any were needed, such winners are proof that capital gains, coupled with dividend growth really can create pure magic for investors' portfolios.
Given the market's recent dive, I can't wait to see what Andrew comes up with next for subscribers to Motley Fool Dividend Investor.
