Over the last few weeks, we've watched as the Australian sharemarket has plunged to levels not seen in more than two years.
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell 8.6% in August – its worst month since the Global Financial Crisis – and has continued its decline this week, hovering just above the 5,000 point mark.
As unnerving as a pullback on the market can be however, such heavy falls as those experienced in recent times can create some fantastic buying opportunities – particularly when it comes to dividend-paying companies.
Provided that the underlying business remains solid, a pullback in a company's share price should prove favourable to the stock's dividend yield. That is, as the share price falls, the dividend yield increases.
In fact, The Age is even reporting that the spread between the 10-year bond yield and shares has widened to levels not seen since the GFC.
As a perfect example, BHP Billiton Limited (ASX: BHP) trades on a 7.1% fully franked dividend yield, grossed to 10.1%, while Commonwealth Bank of Australia (ASX: CBA) offers a 5.8% fully franked yield, or 8.4% including the tax credits.
Both of these are considerably more attractive than bond yields, or otherwise the returns on offer from term deposits in this low interest rate environment.
Personally however, I don't believe that either BHP or Commonwealth Bank present as compelling opportunities right now.
Sure, their yields are great, but BHP is facing strong headwinds from falling commodity prices, while the banks are staring at tougher regulations and more difficult conditions to achieve earnings growth. Shares of both companies could retreat, offsetting any gains to be made from the dividends themselves.
Thankfully, there are a number of other fantastic dividend-paying companies that I think are worth pursuing instead. One such company is JB Hi-Fi Limited (ASX: JBH).
Although the retail environment is tough, JB Hi-Fi has time and again proven its ability to adapt to the changing consumer trends, as demonstrated by its latest push into the white goods market through its HOME format stores. JB Hi-Fi shares are trading at $17.99, and offer a 5% fully franked dividend yield.
Woolworths Limited (ASX: WOW) has had a dreadful run over the last 12 months, and its earnings are tipped to come under fire again during the current financial year. However, a change of management could be just what the company needs to get back on track and to ultimately win back market share from Coles – owned by Wesfarmers – and German discount retailer Aldi.
At $25.50, Woolworths shares are trading at a near 52-week low, and at levels last seen in early 2012. At that price, they also offer a fully franked yield of 5.5%, grossed to 7.8%.
Retail Food Group Limited (ASX: RFG) has also come under heavy selling pressure over the last six months and finds itself trading at just $4.31 – down from $8.00 in March.
The company's performance has been hindered by the issuing of new shares (diluting earnings per share) but the company itself still maintains reasonable growth prospects in the years ahead. From its current share price, Retail Food Group offers a 5.4% fully franked dividend yield.
While all three of the companies mentioned above could appeal to those looking for both income and growth, they also stand to benefit if the Reserve Bank of Australia cuts interest rates again this year. According to the Fairfax press, the markets are pricing in a 91% chance that will happen which would make dividends from these companies all the more appealing.
