5 penny stocks with dividends

British pound coins in birds' nest

Many investors choose penny stocks for growth not income. But many shares trading for less than a pound also offer income potential. These are penny stocks with dividends – and there are lots of them.

I’ve identified five penny stocks with dividends. But here’s why I’d only consider investing in some of them for my portfolio.

Lloyds

It may seem strange that the high street bank Lloyds, with its £33bn market capitalisation is a penny share.

But it is – and it has restarted dividends after being forced to cancel them last year by its regulator. The same regulator this week lifted its remaining restrictions, so the current yield of 1.2% could be raised. With the excess capital Lloyds has accumulated over the past eighteen months, I also see potential for a special dividend from the bank in future.

But there are risks here. Last year the company made large provisions for possible loan defaults. It was able to release many of them later, but it was a reminder that any housing downturn that leads to higher default rates could hurt the bank’s profits.

Income & Growth VCT

The Income & Growth trust regularly pays outs income, although the amount varies each year based on how its underlying investments are performing. But with the current share price of 87p, last year’s dividends of 14p would equate to a yield of 16%. That seems high to me, but even the prior year’s dividend of 6p would suggest a yield of 7% if matched this year. That is certainly possible, as a 5p interim dividend has already been declared.

One risk here is that the company invests in a lot of small companies, which could be at the sharp end of a struggling economy.

Penny stocks with dividends: Airtel Africa

International telecoms specialist Airtel Africa is trading at 81p and yields just over 3%. While the dividend is covered by earnings, it’s notable that it fell 50% last year compared to the prior year.

Something that puts me off Airtel is simply that Africa is a complex market in which to do business, with fast changing political and regulatory risks. That can make it hard to move profits overseas to fund dividends, for example.

Healthy income

Shares in healthcare-focussed property developer Assura also trade for pennies, but the company pays out an attractive dividend. The current yield is 3.7%. The company has a progressive dividend policy, which means that it aims to raise its dividend each year.

As the company is structured as a real estate investment trust, dividends are sometimes paid as property income distribution dividends. That can have tax implications for some investors. Assura pays dividends quarterly, which can be helpful in timing one’s passive income. A risk here is the company’s reliance on healthcare tenants, which could expose it to non-commercial considerations when setting rents.

Property owner

Commercial landlord Hammerson is also among penny stocks with dividends, albeit the current yield is only 1%.

But, like Airtel, Hammerson does not match my risk tolerance. Its exposure to the struggling UK retail sector necessitated a hugely dilutive rights issue last year. Hopefully the worst is behind it – but I continue to see this as a challenging business area right now.

The post 5 penny stocks with dividends appeared first on The Motley Fool UK.

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Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.