Australian investors love their dividends – and for good reason.
They provide us with a regular and often reliable source of income, and many come with tax benefits attached in the form of franking credits.
But there is one factor that is often underestimated when it comes to dividend-paying companies.
You see, most investors fear a downturn in the market.
After all, no one enjoys watching their share portfolios fall day after day, fearing when – or if – the volatility will ever end.
But while share prices are falling, the dividend yields on offer are actually improving, all other things being equal. That's because share prices and dividend yields are inversely correlated.
Take Commonwealth Bank of Australia (ASX: CBA) shares as an example. The bank's shares are currently trading for $74.71 on the ASX, and are expected to pay about $4.20 in dividends in financial year 2016 – or roughly the same amount as they paid last year.
At today's price, the shares trade on a forecast yield of 5.6%, fully franked.
But let's say the shares had never fallen from their highs of 2015, and were still trading around the $96 mark. Based on the same dividend expectations, the shares would yield just 4.4%.
From that example, it is clear how falling share prices can benefit investors who are focused on long-term returns as opposed to short-term movements.
But while I think Commonwealth Bank is a great business, I don't necessarily think its shares are a great buy today.
After all, it has limited growth options while there are also a number of headwinds facing the sector which could impact its earnings potential.
Still, there are plenty of opportunities outside of the major banks.
Although the market has settled in recent weeks, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is still hovering around 15% below its high levels from roughly 12 months ago.
3 ASX Dividend Shares You Need To Know About
With that in mind, here are three shares offering great dividend yields which I think could make for great additions to your portfolio. There's no rush to buy them today of course, but perhaps you could afford some time over the Easter long weekend to look into the opportunities a little further…
Retail Food Group Limited (ASX: RFG) is a master franchisor behind popular businesses such as Gloria Jean's, Donut King and Crust Pizza, to name just a few. It has a very reliable source of income while its franchisees also provide the capital for much of the company's overall growth. Furthermore, the company is ramping up its international expansion which should help to generate plenty more growth over the coming years.
Despite its prospects however, Retail Food Group's share price has fallen well below its high of $8.00, achieved a little over 12 months ago. At just $5.09 today, the shares are trading on an attractive yield of around 4.9%, fully franked. That grosses to 7%.
Telstra Corporation Ltd (ASX: TLS) has had its issues recently, and some investors are likely beginning to doubt the quality of the business. The telco's customers have suffered four mobile outages in less than two months, contradicting Telstra's reputation as the country's most reliable mobile service provider. Still, it's hard to imagine a mass exodus of customers just yet, while Telstra also has other growth avenues in the form of machine-to-machine communications and eHealth.
Telstra's shares soared between early 2011 and early 2015, but have since come off the boil. From around $6.70 a share in February last year, the shares are currently trading at a 22% discount at $5.23 and are expected to pay about 31 cents per share in dividends this year. That equates to a fully franked yield of 5.9%, grossed to 8.5%.
Flight Centre Travel Group Ltd (ASX: FLT) has had its fair share of critics in recent years, mostly related to the brick and mortar travel agent's ability to stay relevant in a world where more and more transactions are completed online. But Flight Centre continues to prove its doubters wrong, and that trend could well continue over the coming years. To begin with, many travellers want to actually speak to an agent when booking their travel plans, which is one advantage held by the business. Meanwhile, it is moving into other initiatives as well including tours and additional online services which should all complement its offering to customers.
Flight Centre's shares are currently changing hands for about $42.50, down from a 52-week high of $47.38. The company enjoys strong operating cash flows and a very strong balance sheet which should enable it to maintain and grow its dividends to shareholders. As it stands, the shares are trading on a forecast yield of around 3.8%, fully franked.
