Stock market crashes are events that most investors don't find pleasant. There's a part of human nature that simply abhors seeing the value of one's investments drop substantially outside the investors' control. But if there is a stock market crash this year, I'll be champing at the bit to boost my passive income.
Why? Well, stock market crashes typically send the value of all shares, not just weak ones, down the gurgler. Just take a look at what happened to the S&P/ASX 200 Index (ASX: XJO) during the COVID crash of 2020. Or the global financial crisis of 2008.
But this can be a massive buying opportunity, especially for dividend investors.
Stock market crashes are dividend blessings in disguise
See, the dividend yield an investor can expect is a function of two different inputs. The first is how much in dividends per share a company pays out. The second is the share price. Put simply, the lower a company's share price is, the higher its dividend yield will be.
There are plenty of ASX shares that don't tend to cut their dividends even in a recession or stock market crash. Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL), Washington H. Soul Pattinson and Co Ltd (ASX: SOL)… These are all ASX dividend shares that didn't cut their payouts in 2020 or 2021.
But buying them during the COVID crash of 2020 could have been enormously beneficial to a dividend investor. Let's look at why.
So in 2019 and 2020, Telstra paid out an annual dividend of 16 cents per share. In early 2020, Telstra shares were trading at $3.90 apiece. A 16 cents per share annual dividend would have given Telstra investors a dividend yield of 4.1% at this share price. But by May 2020, Telstra shares had crashed to around $2.99.
If an investor bought Telstra shares then, they would instead enjoy a dividend yield of 5.35%.
Telstra has since upped its annual dividends to 16.5 cents per share in 2022. That would boost the yield on cost of our investor who bought Telstra shares for $2.99 to 5.52% today.
So this is how a dividend income investor can boost their passive dividend income in a stock market crash. It's certainly the strategy I'll be trying to employ if there is a stock market crash in 2023.
