The ASX share market has been through a lot over the past three years. But the present time could be a rare opportunity to buy ASX dividend shares whilst they offer excellent dividend yields. Of course, this has the potential to significantly grow our passive income.
Interest rates have shot higher to try to tame inflation and dampen what's seen as excessive demand in the economy.
Yesterday, the Reserve Bank of Australia (RBA) decided to increase the official cash rate by another 25 basis points (0.25%) to 3.35%.
In theory, a higher interest rate should push down asset prices. So, the decline we've seen with some assets is probably justified.
So, not only do shares become cheaper than they used to be, but investors get the opportunity to boost their passive incomes.
That's because when share prices fall, it has the effect of increasing dividend yields.
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Passive income boosted by higher dividend income
Here's an example. If a company had a dividend yield of 5%, investing $1,000 into that ASX share would achieve $50 of annual passive income.
If the share market turns into a bear market, sending that share price 10% lower, the dividend yield would translate into a 5.5% dividend yield. Investing $1,000 would achieve $55 of annual income. Certainly, an extra 0.5% return each year can add up over the years.
Of course, dealing with bigger sums would make a bigger difference. Investing $1 million with that extra 0.5% would be an additional $5,000 of annual income.
The higher the starting dividend yield, the more of a boost investors get from falling share prices. For example, a 10% dividend yield would turn into an 11% dividend yield after a 10% share price drop.
I don't think that some of these businesses are going to experience deteriorating conditions forever. Retailers may be facing a tricky 2023, but the longer term could see the economy return to normal-ish trading conditions.
ASX dividend shares that are now paying a bigger yield
There are many examples of ASX companies taking a hit to their share prices, including Wesfarmers Ltd (ASX: WES) as seen below.
Since August 2021, the Wesfarmers share price has fallen around 25%. Commsec numbers suggest that the owner of Bunnings and Kmart might pay a grossed-up dividend yield of around 5.25% in FY23.
From November 2021, the Nick Scali Limited (ASX: NCK) share price has declined by around 35%. Commsec numbers suggest the furniture retailer could pay a grossed-up dividend yield of around 11% in FY23.
Pathology giant Sonic Healthcare Ltd (ASX: SHL) has seen its share price decline 20% over the past year and 35% since the end of 2021. Commsec numbers suggest a grossed-up dividend yield of 4.75% could be the payout in FY23.
Foolish takeaway
This period of time seems like a great chance for investors to make passive income from ASX dividend shares while they're offering boosted dividend yields. Certainly, I'm on the hunt for much cheaper opportunities that could deliver outperformance and income growth over the coming years.
