I wouldn’t quite say that I love stock market corrections or crashes! No one likes seeing the value of their portfolios go through the floor. But they do provide an excellent opportunity for investors to supercharge their passive income potential.
Why? When stock markets slump, the dividend yields on income-paying shares can shoot higher. What this means is individuals buying new shares get more in dividends for every pound they invest.
Let’s look at this in a little detail. I’ll also reveal a brilliant dividend share I’m considering today after recent price weakness.
What’s going on?
The FTSE 100 is the most popular stock index on the planet for dividend investors. This is thanks to London’s strong dividend culture, which can help deliver a strong return across the economic cycle.
The Footsie isn’t packed with sexy growth stocks like, say, the S&P 500. But this can also be an enormous advantage, as the mature industries UK blue-chips largely focus on tend to generate steady cash flows that support reliable dividend payments.
Aviva, for instance, has a huge general insurance division whose profits remain stable over time. Unilever‘s focus on non-cyclical food and personal goods products provides the same stability, as does BAE Systems‘ focus on the defence sector.
Have you spotted the other thing these companies have in common? Each enjoys excellent competitive advantages — like incredible brand recognition and market-leading products — that keeps earnings and dividends afloat in tough times. Each also enjoys diverse revenue streams that protect from specific market or regional shocks.
Unilever sells its products into 190 countries, for example, and sells everything from deodorant and toothpaste to mayonnaise and washing detergent.
What should I buy?
Yet despite these defensive qualities, each of these shares has plummeted over the last week. Aviva’s share price is down 7%. BAE Systems and Unilever shares have dropped 5% and 6%, respectively.
This has in turn given their dividend yields a healthy boost. Some UK stocks have fallen even more sharply, providing dividend investors with lots to get their teeth into.
I’m looking closely at National Grid (LSE:NG.) shares for passive income. It’s the FTSE 100’s biggest faller over the last week — down 9% — driving its forward dividend yield to an index-beating 4%.
All-round value
That’s not all, as the power grid operator’s price-to-earnings (P/E) ratio has dropped to 13.5 times. That’s below the 10-year average of 15–16, providing an added sweetener.
There’s no such thing as a ‘no-brainer’ dividend stock. In this case, National Grid could be hit hard by rising interest rates that inflate its borrowing costs. But on balance, I think it’s a top stock to consider in these uncertain times. The essential service it provides means reliable cash flows it can use to pay juicy dividends whatever the weather.
What’s more, selling non-core divisions (like its renewable energy division) gives it added capital to fund investors’ passive income. It’s one of several top dividend shares I’m looking at today.
