Penny stocks are firms which have a share worth of lower than £1. This is the most easy goal definition. From a subjective perspective, some assume that penny stocks are dangerous, small firms which are pushed as a part of scams. Although some do fall into this class, I can filter these out by penny stocks which have giant market capitalisations.
Once performed, I can then really feel extra snug in firms that (apart from potential share worth progress) might supply me some engaging dividend funds.
Opportunities apart from progress
The progress alternative from penny stocks is certainly one of the factors that makes buyers like me drawn to them. In idea, firms have a low share worth for 2 predominant causes. The first one is that the firm is new and rising, with a possible for the share worth to proceed to push greater. Secondly, a longtime firm might need seen the share worth fall to low ranges due to adverse enterprise developments or the affect of exterior components, corresponding to the pandemic.
Either situation doesn’t rule out the potential to choose up some passive income through dividends. For instance, Lloyds Banking Group is a penny inventory, buying and selling round 44p. The affect of the pandemic has seen the share worth fall significantly from ranges seen at the begin of 2020. Yet in the current half-year outcomes, the financial institution confirmed resumption of a dividend.
Currently the dividend yield is 2.76%, which is barely beneath the FTSE 100 common. However, it’s nonetheless above the 2% fee of inflation now we have right here in the UK at the second. When I additionally examine this to the rate of interest I’m getting on my money accounts, the dividend yield is engaging.
Using the better of each worlds with penny stocks
Even if I’m not particularly on the lookout for share worth progress from penny stocks, it does help. For instance, let’s say I invested in a penny inventory that had a dividend yield of three% which I held for 3 years. During this time, the share worth rallied 20%. When I come to promote the inventory, the revenue from the share worth can be seen as further income on high of my preliminary funding.
So if I loosen my definition of income from shares, there’s even greater potential when I look to penny stocks. The flipside of this additionally applies although. If I make investments in a inventory at 10p and the worth falls to 5p, I’m down 50%. I’d want to maintain onto this inventory for a few years earlier than the dividend income would offset this loss if I offered it at 5p.
Overall, I assume penny stocks supply me good potential as an income investor. Clearly, I can choose up dividend income (so long as the dividend is paid, which isn’t assured). On high of this, if the penny inventory does see sturdy share worth beneficial properties, when I promote the inventory I can deal with the revenue as a further closing income cost.
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jonathansmith1 has no place in any share talked about. The Motley Fool UK has really helpful Lloyds Banking Group. Views expressed on the firms talked about in this text are these of the author and due to this fact might differ from the official suggestions we make in our subscription providers corresponding to Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we imagine that contemplating a various vary of insights makes us higher buyers.