I believe that market crashes can be very useful times to buy ASX dividend shares.
What’s going on with share markets?
At the moment the S&P/ASX 200 Index (ASX: XJO) is down more than 1% and the NASDAQ Composite fell by 3.7% overnight.
There is a resurgence of COVID-19 cases across both the USA and Europe. France has just gone into a second national lockdown until at least the end of November where French people can only leave their home for very limited reasons.
Investors are obviously concerned that businesses are going to suffer a second period of disruption to profits (which is what share prices are largely based on).
There aren’t many ASX shares that are currently in the green, but there are plenty in the red such as gold miners like Westgold Resources Ltd (ASX: WGX), Ramelius Resources Limited (ASX: RMS) and Saracen Mineral Holdings Limited (ASX: SAR).
Why market crashes are a good time to buy ASX dividend shares
I think that market declines are really good opportunities to buy ASX dividend shares.
When a quality share like Xero Limited (ASX: XRO) falls, we get the opportunity to buy shares at a cheaper price. You (hopefully) benefit as the share price recovers.
But not only does the share price of an ASX dividend share fall when markets decline, but the prospective dividend yield increases as share prices decline.
For example, if business offers a dividend yield of 5% and then the share price drops 10% it will mean the trailing dividend yield will be 5.5%.
But a key question is whether the dividend (and the profit) of the business is going to be affected.
Think about an ASX dividend share like APA Group (ASX: APA). Its profit isn’t going to be significantly affected by many issues, including COVID-19 in the US and Europe.
Meanwhile, a business like private hospital operator like Ramsay Health Care Limited (ASX: RHC) could be materially impacted again. Private operations, which is where Ramsay makes a lot of its profit, were already disrupted in Europe earlier in the year. Europe’s second wave could see more disruption for Ramsay.
So, I don’t think that every business is a buy just because it’s gone down in price. Sometimes a business can decline and be expensive, whereas something could rise and be cheap.
Some ASX dividend shares worth considering
I think the ones worth thinking about are ASX dividend shares that are likely to maintain or grow the dividend even in difficult market conditions.
Some of the shares that increased their dividend earlier in the year are some of my top candidates. For example:
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) offers a grossed-up dividend yield of 3.5%.
Brickworks Limited (ASX: BKW) has a grossed-up dividend yield of 4.8%.
Rural Funds Group (ASX: RFF) has a projected FY21 distribution yield of 4.6%.
APA Group has a distribution yield of 4.7%.
WAM Leaders Ltd (ASX: WLE) has a forward grossed-up dividend yield of 8.2%.
Future Generation Investment Company Ltd (ASX: FGX) has a grossed-up dividend yield of 6.5%.
I think each of the above ASX dividend shares offer strong income reliability over the next 12 months, even if there’s a lot of volatility over the rest of the year.
There are plenty of businesses that I think look better value today compared to yesterday or a couple of weeks ago. At today’s share prices I think I’m most attracted to Brickworks. It has a solid starting dividend yield and it’s exposed to the recovery of the Australian construction industry whilst the dividend is backed by its defensive assets.
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Tristan Harrison owns shares of FUTURE GEN FPO, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended Brickworks, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of APA Group. The Motley Fool Australia has recommended Ramsay Health Care 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 Scott Phillips.
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