Falling ASX share prices = bigger dividend yields. Here’s what you need to know

Lower ASX share prices can give dividend investors higher yields. Here’s why.

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Key points

  • The ASX 200 has had a horror few days
  • But when share prices fall, it can be a great opportunity for dividend income investors
  • So let's see why yields rise when shares fall 

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.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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