By now, chances are you've heard that the S&P/ASX 200 Index (ASX: XJO) has had a rough couple of days. The ASX 200 has lost more than 1% on Wednesday, putting its five-day losses at a painful 6.8% or so. Not many investors enjoy a red market like the one we've seen this week. But it does carry a fairly significant silver lining: higher dividend yields.
Every ASX dividend share has a dividend yield. This is the number (expressed as a percentage) that is usually quoted when one enquires about a company's dividend. For example, on current pricing, Commonwealth Bank of Australia (ASX: CBA) shares have a dividend yield of 4.15%.
But this metric is not a static one. It uses two different numbers to get there. The first is the dividends per share that a company pays out. In CBA's case, this ASX bank has paid out $3.75 in dividends per share over the past 12 months.
But the second is the company's share price itself. By dividing $90.46 (CBA's current share price at the time of writing) by $3.75, we get to a dividend yield of 4.15%. That means that if CBA pays out the same dividend over the next 12 months as the previous, an investor putting $100 into CBA shares right now can expect a dividend return of $4.15, or 4.15% of that $100.
Why do lower share prices bring higher dividend yields?
So getting a dividend from an ASX share is influenced by these two factors. Thus, if a company's share price falls, but its dividends remain consistent, the dividend yield that investors can expect from buying additional shares rises.
As a case in point, CBA shares have fallen from $102.40 last Wednesday to the $90.45 we see right now. This means that if an investor bought CBA last week, their shares would have offered a yield of 3.66%. Today, those same shares offer a yield of 4.15%.
If CBA maintains or raises its dividend next year, an investor who bought in at $90.46 can expect a higher dividend yield (and income) than the investor who bought at $102.40.
So falling share prices aren't always bad for long-term investors. Sure, it's never fun watching the value of your shares drop in value. But it also shows that these occasions can be a potent buying opportunity for the brave of heart.
