Most investors despise ASX share market volatility. While market fluctuations do give savvy investors periodic buying opportunities for their favourite shares, none really enjoys that lack of control over the valuation of the assets you own, and put your hard-earned money into.
But that's where ASX dividend shares can come in.
It's very hard to share in the lucrative returns of the share market without the volatility that comes along with them. Normally, investors who really want to avoid volatility use safer, low-return assets like cash and fixed-interest investments to reduce the volatility of their portfolios. But this strategy sacrifices overall returns to do so.
But one often underappreciated way investors can mitigate the effects of volatility is through dividends.
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How can dividend shares smooth the ride?
Investing in dividend shares is one of the best ways you can nullify some of the nasty effects of market volatility without sacrificing the significant returns that shares can provide.
Share market volatility comes from the fluctuations in share price that we see on the markets every day. If you own shares, changing prices can increase or reduce your capital when the markets are open. Usually, these changes are small. But during events like a stock market crash, they can be dramatic and unnerving, to say the least.
That's where dividends come in. Dividends are, of course, cash payments made by a company to its owners, the shareholders. On the ASX, dividends are usually paid twice a year, although some companies offer quarterly or even monthly dividend payments in rare cases.
Dividends are the other way we can make money by investing in shares, aside from capital growth. If a company's share price loses 2% over 12 months but pays out dividends worth 4% of your invested capital, then you have technically still made a 2% profit.
Here's a real-life example…
Over the past 12 months, the Coles Group Ltd (ASX: COL) share price has had a very volatile rise indeed. Just take a look below to see this in action:
Between August and October last year, the Coles share price fell by around 15%. It then recovered by 15% between November and April 2023. Those sorts of moves can be a little disconcerting for investors.
But consider this. Over the past 12 months, Coles has also paid out a total of 66 cents per share in dividend payments. That gives the company a trailing yield of 3.7% on today's pricing. Those dividends came fully franked too. This would mean this yield grosses up to 5.29% if we include the value of those franking credits.
So sure, a Coles investor saw the value of their shares fall by 15% over the past 12 months. But those dividends provided some meaningful cash flow over this time too. So if you offset that capital loss of 15% with that near-4% dividend, it reduces the loss by almost a third. More than a third, if you include the value of those franking credits as well.
Coles' last final dividend was paid out on 28 September last year too. So a savvy investor could have reinvested that dividend into even more Coles shares when the company was at its low point for the year. This would further mitigate the effects of that volatility by picking up Coles shares at a cheap price.
Shares are inherently volatile. But this example hopefully shows how dividends can sand off the worst edges of that volatility.
