ASX 200 correction: A once-in-a-lifetime chance for supercharged passive income!

A market decline can mean dividends galore for passive income hunters.

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Key points

  • When share prices fall, it has the effect of boosting the dividend yield for potential investors
  • For example, a 5% dividend yield becomes a 5.5% yield if the share price of the company drops 10%
  • Some names that have dropped over 40% include Domino's and Pinnacle

The S&P/ASX 200 Index (ASX: XJO) itself hasn't fallen that much in 2022. But a number of businesses fell much harder than the index, with the effect of significantly boosting their dividend yield.

There have been points in the year where the ASX 200 was down around 15%. While some names within the index were down further.

Example of how dividend yield is boosted

If an ASX 200 dividend share had a 5% yield and then the share price drops 10%, this would turn the yield into 5.5% for new investors.

A fall of 20% would mean the 5% yield turns into a 6% yield for investors buying shares.

A decline of 30% means the 5% yield is boosted to 6.5%.

And so on.

Of course, those yields are only correct if the dividend is at least maintained.

But, it can make a big difference to how much dividend cash is produced.

A $5,000 investment with a 5% dividend yield generates $250 of annual dividend income.

A $5,000 investment with a 6.5% dividend yield makes $325 of annual dividend income.

Which ASX 200 shares have seen a big dividend yield jump?

Some businesses have suffered declines, and their dividends may remain largely intact. But, be wary of some yields that could be dividend traps. In other words, the dividends in the last financial year may be nowhere near as good as the next financial year.

Domino's Pizza Enterprises Ltd (ASX: DMP) shares have declined by around 45% in 2022 to date. According to the CommSec estimate, Domino's is projected to pay an annual dividend of $1.50 per share in FY23, translating into a grossed-up dividend yield of around 3%.

Created with Highcharts 11.4.3Domino's Pizza Enterprises PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Pinnacle Investment Management Group Ltd (ASX: PNI) – the outfit that invests in fund managers – has seen its share price also decline by around 45%. It's projected to pay an annual dividend per share of 32 cents in FY23 according to CommSec. This translates into a forward grossed-up dividend yield of 5.2%.

Created with Highcharts 11.4.3Pinnacle Investment Management Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Premier Investments Limited (ASX: PMV) – the owner of Smiggle, Peter Alexander and Just Jeans – has seen a share price drop of almost 20% in 2022. CommSec estimates suggest an annual dividend of $1.01 per share, which translates into a grossed-up dividend yield of 5.75%.

Created with Highcharts 11.4.3Premier Investments PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

Foolish takeaway

Investors that can take advantage of lower ASX 200 share prices and higher dividend yields give themselves the opportunity of ramping up their passive income at a much quicker rate than what was achievable in 2021.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Pinnacle Investment Management Group. The Motley Fool Australia has positions in and has recommended Pinnacle Investment Management Group. The Motley Fool Australia has recommended Domino's Pizza Enterprises and Premier Investments. 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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