Penny Stocks with High Dividend Returns
How can you achieve penny stock returns while still being able to make money while you wait? In this video, I’ll show you how to make a dividend-paying penny stock list. After that, we’ll utilise a simple penny stock screener to limit down our options. Then I’ll show you seven penny stocks to keep an eye on that will pay you while you wait!
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You know how much we adore penny stocks here on the channel, right? From Veritone to Tellurian and Ryerson, and everything in between… Elevate Credit, a laggard, has returned 100 percent or more in less than a year.
But we also like dividends, and a three- to five-year holding period for a penny stock is a long time to go without getting paid.
While most penny stocks do not pay dividends, if you know where to look, you can get both!
To begin our penny stock dividend list, we’ll use a simple stock screener in this video. I’ll next teach you how to narrow down your options and choose the best for both return and cash flow. Then I’ll reveal the seven penny stocks to keep an eye on if you want to have the best of both worlds!
I’m excited to get started and dive into those penny stocks, but stay with me because after those seven stocks, I’ll show you three dividend penny stock traps to avoid!
I’ll start my penny stock list with Webull’s screener, and we’ll use the app to do further research on each stock afterward. I’ll start by looking for stocks with a market capitalization of less than $500 million, but you may play around with this and look for anything with a market capitalization of less than a billion dollars.
Now I’d like to address this because I’m sure I’ll get some feedback. A penny stock does not have an established definition. A corporation with a market capitalization of less than a billion dollars is the unofficial, accepted standard. Those are the types of small businesses we’re seeking for, with the flexibility and possibility for expansion.
What to Consider When Investing in Penny Stocks
A penny stock is NOT a stock that trades for less than $1 or even $5 per share. As you can see, a company’s stock price has little to do with its value or potential growth. It’s just a function of the company’s market capitalization and the number of shares it has issued. Sirius XM, for example, is a $26 billion firm… This is a massive company, and no one would consider it a penny stock, but with 4.1 billion shares issued… Apiece one costs only $6.32 each. Compare that to Webco Industries, a steel manufacturer based in Oklahoma with a market capitalization of $98 million and a share price that has risen 37 percent in the last year, indicating the potential for growth of a penny stock. However, because the corporation only issued 887,000 shares, each one is worth $110!
So don’t believe that penny stocks have to be cheap. Low-cost equities aren’t always low-cost, and high-cost stocks aren’t always pricey… Price-to-earnings or price-to-sales ratios can help you figure this out.
Returning to the screener, we’ll now adjust the slider to include stocks that offer at least a one-percent yield, ensuring that our list only contains dividend-paying penny stocks.
Dividend-Paying Penny Stocks
Now that you know the basics, I like to use the Return on Equity and Return on Assets filters to locate companies with positive assets and equity returns. We’ll move the sliders on both of these to at least a positive return as a quick approach to filter your selection to only the top performing penny stocks.
There are some technical filters, and I occasionally use the RSI24 Oversold screener to uncover stocks with good technical upside, but I won’t worry about it because I’m seeking for long-term holdings here. At the bottom, you can see how many stocks fit the screener, and I can save my screen, which will keep updating whenever I click on it, so I’ll call this penny stock dividends.
All seven of these penny stocks will be added to my paper portfolio on Webull for you to follow. I like the analysis I get from Webull, but my favourite feature is the stock simulator. The software provides you a million dollars to track your favourite ideas in a paper portfolio before investing real money!
Now I’ll show you those seven dividend-paying penny stocks, but you’ll see that they’re mostly regional banks, asset managers, and business development firms. While these aren’t the 10X penny stocks you might be looking for, they can nevertheless provide a high return and steady cash flow while you wait. In fact, the seven stocks I’ll show you have an average annual return of 65 percent and a dividend yield that is more than twice the market average.
The question is, if you had to choose between larger potential growth in a penny stock firm that doesn’t pay dividends and yet solid profits and an annual payout, which would you choose?
7 Penny Stocks That Pay Dividends
The $377 million Mesabi Trust (ticker MSB), a steel royalty trust paying a 4.8 percent dividend and up 105 percent in the previous year, is our first penny stock here.
Mesabi is a remarkably straightforward investment. Cleveland Cliffs has a royalty in mines managed by Northshore Mining, a Cleveland Cliffs subsidiary. Northshore mines the ore, processes it into pellets, and ships it to Cleveland Cliffs, where it is sold. Mesabi receives royalties based on the sale price. Mesabi has no operating responsibilities or costs; it is simply a trust that receives royalties.
That implies the return will be determined by iron ore prices, which are at multi-year highs but still below the 2008 peak. Goldman Sachs says we may be entering a new commodity super-cycle, and if even a portion of the projected $3 trillion infrastructure programme passes, I expect prices to skyrocket, and this stock to soar much higher.
Capital Southwest, or CSWC, is a $433 million business development corporation founded in 1961 that provides loan, private equity, and venture capital to mid-market and late-stage enterprises.
So these BDCs’ business strategy is that they put a financial hold on mid-sized firms. Small firms can go to their local banks for loan, and huge enterprises can receive bond funding or issue stock on the market, but enterprises with annual revenues of $20 million to $40 million go to these business development corporations for financing and equity investments.
Capital Southwest offers a generous 7.6% yield and has a track record of paying regular, supplemental, and special dividends. It was able to maintain regular and additional dividends even last year.
The company’s stock has risen 140 percent in the last year, and the average debt yield on its loans is 9.9%, which is something you should always verify when investing in BDCs. Because the dividend yield is your gauge of dividend sustainability, you’ll want to compare the company’s weighted average loan yield, which is 9.9% in this case, to the dividend yield. Is the amount collected by the corporation greater than the amount paid out?
Shares are currently priced at 1.39 times book value, making it a little more costly than some of the other financial companies on the list, but with a strong dividend and price return.
With a lot of these, you’ll hear me mention the price-to-book value ratio, so let me explain why. Most of you are more familiar with the price-to-earnings ratio, which compares the price per share paid by investors to the earnings per share generated by a company. The book value of all their loans and other assets is considerably more relevant for financial organisations, such as these BDCs and banks, thus we look at the price-to-book value for a more accurate comparison.
Gladstone Investment Corporation (ticker: GAIN) is next on our list of penny stock dividends. This is a $400 million private equity fund that also lends, therefore it fits the BDC paradigm. However, the organisation concentrates more on equity investments, with a target of 25% ownership and 75% debt in the businesses it works with.
Gladstone has a well-diversified portfolio that spans 28 firms in 13 categories, ensuring that problems in one area or company will not derail the portfolio.
The stock pays a 6.9% dividend yield, with annualised payout growth of roughly 2%, excluding the supplemental payments it has been paying. Even last year, the corporation was able to pay both the standard and excess dividends of $0.21 per share. The stock has risen 71% in the last year and now trades at 1.09 times book value.
We still have four more penny stocks to look at, but I’d like to personally ask you to subscribe to The Daily Bow-Tie, my free daily market newsletter that keeps you up to date on all the latest stock market news, tactics, and trends. It’s completely free, and it’s just something I want to do for the community.
Penns Woods Bancorp, ticker PWOD, a $170 million regional bank with 27 branches in Pennsylvania under the JSSB and Luzerne Bank names, is next on our penny stock list.
Penns Woods has a net interest margin of 2.9 percent, which is marginally below the peer average of 3.2 percent, and keep in mind that this is a bank’s most important metric of profitability. The net interest margin is the difference between what a bank charges on loans and what it pays out on savings, and I believe Penns Woods has space to improve this. The loans-to-deposits ratio is also lower, at 90%, compared to the peer average of 93 percent, indicating that there is room to make more loans at a larger profit margin.
For those of you who don’t know, banking companies are among my favourites this year because when long-term interest rates climb, banks will be able to make more money on new loans. The stock pays a 5.4 percent dividend yield and has increased by 20%, but it still only trades for 1.04 times its price-to-book value.
Weyco Group (ticker: WEYS), a $212 million penny stock, adds some variety to the banking and BDC theme.
Weyco owns the Florsheim, Nunn Bush, Stacy Adams, and BOGS footwear brands, which it sells through its own stores and through other retailers. Florsheim is one of my favourite shoe brands, and with the expected increase in retail spending this year, sales could soar.
Weyco’s stock yields 4.2 percent and has risen 20% in the last year, but it trades at just 1.1 times trailing sales, which is a fair price for a retailer.
LCNB Corporation (ticker: LCNB) is a $224 million regional bank founded in 1877 with 33 offices in Ohio.
If you’ve been watching the channel, you’ll know that one of the things I’m keeping an eye on in bank stocks this year is the amount the company set aside in loan loss provisions last year. This is similar to a cash reserve account that a corporation establishes in the event that loan defaults become problematic during a recession. The corporation deducts money from its operational profits and places it in a separate account on the balance sheet.
What we’ve found is that loan defaults haven’t risen as much as banks predicted. Because all of the stimulus money shielded small businesses from the worst of the pandemic, banks have stashed away billions in this rainy day fund when everything appears to be going well.
LCNB set aside about $2 million in 2020, roughly ten times what it did the year before, so even if it determines it doesn’t need all of that money, moving just $1.5 million back to earnings may mean an extra $0.12 per share for distribution.
The stock has a 4.24 percent dividend yield and has risen 62% in the previous year. LCNB is also one of the most affordable companies in the group, with a price-to-book ratio of just 0.93.
Union Bankshares, with a market cap of $129 million and a ticker of UNB, is at the top of the list before I share those three penny stock dividend traps.
Despite the epidemic, UNB has 20 locations in Vermont and New Hampshire and posted record revenue of $12.8 million last year.
Loan loss reserves grew by $2.1 million, resulting in an additional $0.47 per share profit if released back into earnings. The stock pays a 4.6 percent dividend yield and has risen 40% in the last year, despite being one of the most expensive stocks on the list, with a price-to-book ratio of 1.59.
Don’t click away now! I’d want to show you those three penny stock dividend traps since I’ve seen a lot of people fall for them, and they’ll wipe out your profits.
Dividend Pitfalls to Avoid with Penny Stocks
The first is to just look for dividends with the highest yields. With these seven stocks, we’ve managed to balance our dividend cash flow and penny stock returns, but there’s a cost. If a firm pays out an 8 percent or higher dividend, there’s a fair chance it’s not reserving much of its earnings to fuel stock growth.
Management must choose between returning cash to shareholders and investing for the future in every company. With this penny stock list, we’ve shown that a happy medium may be found for both.
Investing just in banks or BDCs is the next trap in our penny stock traps. You’ll discover the majority of dividend-paying penny stocks in those two areas, either banks or business development companies. If interest rates fall or the economy sinks, investing just in these puts you at risk, therefore search for different types of business, like we did in the list.
This one is a dividend investor’s trap: equities with greater yields solely because their price has dropped. Although the stock prices of the penny stocks on our list have risen, there are still some attractive dividend yields to be found. You certainly must look at a stock price graph here. For example, shares of The GEO Group here appear to be a good buy with a 12 percent dividend yield until you look at the chart and find that the company has lost 32% in the last year, wiping away your dividend return and then some! The dividend is likely to be decreased since it is unsustainable, so make sure you’re investing in strong firms, not simply those with large payouts!