Last week, the S&P 500 entered correction territory. Even though the FTSE 100 has held up reasonably well by comparison, there are concerns that the worst isn’t over and that a larger crash is coming.
Even though no one can predict this outcome, if it does happen, it could provide an opportunity when it comes to passive income potential. Here’s what I mean.
How a crash boosts yields
A stock market crash doesn’t have to fall a set percentage to be characterised as such. I usually say a correction is a drop of 10% in a short space of time. A crash is when the fall’s 20% or more.
If this were to happen, stocks within the index could drop more or less than the 20%. Some shares might only dip 10%, with others falling 30%. Yet the market decline might not specifically impact some stocks. Instead, the fall could be more to do with souring investment sentiment.
And this is the sweet spot of opportunity when it comes to income shares with elevated dividend yield potential.
For example, let’s assume there’s a company that isn’t overly impacted by the reasons for the crash. But investors still rush to sell stocks and hold cash. Let’s say its dividend share has a yield of 5%, with the share price at 100p and then drops by 30% to 70p. Under the premise that general business operations aren’t impacted, the dividend per share shouldn’t really fall. As a result, the share price decline would increase the dividend yield to 7.14%. The increase in that yield is 42.8%!
As a result, owning the same stock after a crash versus before could increase the passive income potential for an investor significantly.
One to consider?
If an investor thinks that the current fall in the stock market will continue to become a full-on crash, one dividend stock to consider having on a watchlist is Pets at Home Group (LSE:PETS). The stock is down 9% over the past year and has a current dividend yield of 5.55%.
Part of the fall over the past year has come as we’ve seen a continued market adjustment after the pandemic pet-owning boom. The steady decline since then has negatively impacted demand for Pets at Home. This is a risk going forward, although I see this as a natural adjustment to historically normal pet ownership levels.
Financial performance recently has eased investor concern. In January, a trading update showed consumer revenue was up by 2.3% versus the same period last year. In addition to maintaining full-year profit guidance, it had an impressive 27% jump in the percentage of revenue that came from consumer subscriptions.
The company has been steadily increasing the dividend per share in recent years. Further, I feel most of the drop in the FTSE 100 and FTSE 250 recently has come due to tariff and trade concerns with the US. Yet this shouldn’t really impact Pets at Home. Therefore, if a crash does push the share price down, I don’t see the dividend as being under threat.
As a result, I think the stock’s worth considering to have on a list for an investor who’s preparing for some income ideas if the market keeps falling.
This post was originally published on Motley Fool
