Here’s how I’m trying to make passive income from penny stocks

Two terms that aren’t often put together are penny stocks and passive income. Why is this? Well, penny stocks are often spoken of in a negative way, as some people think that all of them are poor investments. Passive income is usually spoken in conversation when it comes to dividend-paying stocks. After all, the process of getting paid a dividend as a shareholder is very passive in nature. But what about getting paid income from a penny stock?

Putting the two together

For clarity, a penny stock is simply a company with a share price below £1. I accept that stocks with a share price of just 1p or 2p are likely to be high-risk investments. But for several FTSE-listed companies, a share price above this level can offer me good buying opportunities. In fact, I recently wrote about some that I’d consider buying here.

In order for a penny stock to be able to generate passive income for me, it needs to have a dividend policy. This does shrink the potential pool down. One reason for this is that the smaller the business, the more likely profits are going to be needed as retained earnings. This will help cash flow, particularly during this pandemic period.

The other point why passive income from penny stocks isn’t easy to find is that most investors look to such stocks for share price gains. It’s the growth potential that excites many, not the dividend yield. 

Examples of dividend-paying penny stocks

Despite the above points, I’m still trying to generate passive income. In fact, I think there are some great opportunities to do so at the moment.

For example, Airtel Africa is a penny stock with a share price around 81p. It also pays out a dividend and even with a recent cut, still offers a dividend yield of 3.5%.

Another company I could consider is Assura. The real estate investment trust focuses on healthcare premises. It has a share price of 76p and a dividend yield of 3.76%.

Both stocks offer me fairly attractive yields when I compare them to the broader index. The FTSE 250 average dividend yield is 1.8% and the FTSE 100 average yield is 2.97%.

The potential benefits

The benefit of buying a penny stock for passive income is that the potential to making higher income in the future is there. I acknowledge that penny stocks are often smaller capitalised companies than the FTSE 100 heavyweights. Yet this can be turned into a positive. It offers the firms more scope to grow in the future. 

Although this potential growth will likely be reflected by a higher share price, some of this will also flow to shareholders from higher dividend payments if profits rise. And while as an investor, the income is great, at the same time I’ll still benefit from the share price gains if this occurs. When I sell the stock my total profit would be the sum of the income received as well as the share price return.

The post Here’s how I’m trying to make passive income from penny stocks appeared first on The Motley Fool UK.

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jonathasmith1 has no position in any stock mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.