3 dividend shares to buy and 2 to avoid during a market crash

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been crushed so far in 2016 in what has been the market’s worst start to a year in history. Shares, including many blue-chips, have been hammered and investors’ portfolios have taken a huge hit.

Although it might seem difficult to draw positive conclusions from such a situation, there are two in particular that come to mind:

  1. Heavy selloffs create great, long-term buying opportunities
  2. Dividend yields and share prices are negatively correlated

All other things being equal, when shares fall, their dividend yields also rise. That means you’re not only given the opportunity to buy those high-quality companies at lower prices, you’ll also be rewarded with higher payouts as a result.

Take Telstra Corporation Ltd (ASX: TLS), as the perfect example. At the beginning of the year, the shares were changing hands for $5.61 and offering a 30.5 cent per share dividend, equating to a 5.4% fully franked dividend yield.

However, the shares have since fallen a little more than 4% and are now trading on a fully franked yield of 5.7%. Grossed up, that’s an 8.1% yield!

Indeed, there are more risks involved with investing in the share market than there are with putting your money in a term deposit or investing in government bonds. But it’s difficult to argue with those kind of payouts when the nation’s cash rate is sitting at a measly 2% – and could be set to fall even further.

As quoted by The Australian Financial Review, private wealth manager Karl Goody from Shaw and Partners said: “There’s going to be a continued thirst for yield when you see this gap so wide.”

He added that: “We’re advising people to add to positions and take advantage of this. It’s getting to the point where investors say that although they see additional risk in equities, it’s too much of a gap to pass up on.”

To put the opportunity into perspective, the ASX 200 is hovering at levels not seen since mid-2013. Compared to that time however, The AFR noted that the estimated 12-month dividend per share for companies on the gauge is about 10% higher than it was back then.

That’s a very compelling case for investors wanting to take advantage of the recent pullback in share prices.

Where are the opportunities?

While many investors will turn straight to the traditional dividend payers – companies such as Commonwealth Bank of Australia (ASX: CBA) or Woolworths Limited (ASX: WOW) – there are other opportunities that I believe offer even more compelling value today.

The banks have enjoyed a strong run in recent years but are now facing tougher regulatory headwinds, while Woolworths is struggling to remain relevant as Aldi and Costco carve out a more dominant position in Australia’s grocery channel.

Companies you could look at instead include electronics retailer JB Hi-Fi Limited (ASX: JBH), offering an estimated fully franked yield of 4.3%, or Retail Food Group Limited (ASX: RFG), which trades on a 5.8% fully franked dividend yield.

Investors could also look at Woolworths’ primary rival Wesfarmers Ltd (ASX: WES), the owner of Coles, Bunnings Warehouse and Officeworks. Having first opened in 1914, Wesfarmers has proven its ability to withstand tough economic conditions and currently offers a fully franked yield of 5.1%.

Of course, share prices could fall even lower than they are currently, and if that happens, be sure to be on the lookout for even fatter fully franked dividend yields!

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Motley Fool contributor Ryan Newman owns shares of Retail Food Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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