Do Penny Stocks Pay Dividends? Discover the Best Options for You!

What are Penny Stocks

Penny stocks are stocks that trade for under $5 a share, listed on major exchanges like NYSE or Nasdaq.

Most penny stocks are OTC, some are on the OTCBB or pink sheets and are affected by the overall market.

The term “penny stock” used to mean stocks under $1 a share but the SEC now defines it as any stock under $5 a share.

Dividends are cash paid to shareholders for investing in a company.

Dividend Paying Penny Stocks

One way is to search online using phrases like “penny stocks that pay dividends” or “list of penny stocks that pay dividends”. Investors look for good penny stocks that will give big returns despite being cheap. Another way is to use a stock screener and filter for penny stocks with a dividend payout ratio greater than zero.

More criteria can be added, like only penny stock companies with earnings or profits. A company must have made profit for several quarters or years to have enough retained earnings or cash to pay dividends.

How to Select Dividend Paying Penny Stocks

When selecting dividend paying penny stocks, you need to consider several key factors to make an informed decision. Here are some:

1. Dividend Yield: Look for penny stocks with high dividend yield, which is the ratio of the annual dividend payment to the stock’s price. A higher dividend yield can give you a regular income and help offset the volatility of penny stocks.
2. Dividend Payout Ratio: Check the dividend payout ratio, which is the percentage of earnings paid out as dividends. A sustainable dividend payout ratio is important to ensure the company can continue to pay dividends in the future.
3. Financials: Review the company’s balance sheet, income statement and cash flow statement. Look for companies with good financials, low debt and a history of profitability.
4. Industry Trends: Look at the industry trends and the company’s position in the industry. Look for companies with a moat, strong market presence and growth.
5. Management: Look at the management team’s experience, track record and commitment to paying dividends. A good management team can make a big difference in the company’s ability to make profits and pay dividends.
6. Liquidity: Check the stock’s liquidity by looking at the trading volume and market cap. A liquid stock will give you easier entry and exit points and reduce the risk of big losses.
7. Regulatory Compliance: Make sure the company is compliant with regulatory requirements like filing financial reports with the Securities and Exchange Commission (SEC).

By using these criteria you can increase your chances of finding dividend paying penny stocks that can give you a regular income and potentially long term growth.

Benefits of Investing in a Dividend Paying Penny Stock

• Dividend paying penny stocks can increase the overall return of your portfolio.
• For example, an investor can buy 3 penny stocks, each paying 5 cents per year.
• The dividend can add 20% or more to your net profit.
• But dividends alone don’t guarantee profitable penny stock trading and investors should be aware of the risks.

Risks and Considerations for Penny Stock Investors

Small penny stock companies have no market liquidity, making it hard to sell your stock otc.

Lack of financial information about these companies make it difficult to make an informed decision.

Prices quoted in the market for a penny stock can be different from the listed price due to low liquidity and no seller.

As with any investment you can lose all your initial investment in penny stocks.

Tax Implications of Dividend Income from Penny Stocks

Dividend income from penny stocks is taxable and you should understand the tax implications to minimize your tax liability. Here are some key tax considerations:

1. Tax Rates: Dividend income is taxed at a lower rate than ordinary income, 0% to 20% depending on your income tax bracket.
2. Qualified Dividends: To qualify for the lower tax rates the dividend must be a “qualified dividend”. This means the dividend must be paid by a US corporation or a qualified foreign corporation and you must have held the stock for at least 61 days during the 121-day period starting 60 days before the ex-dividend date.
3. Tax Deferred Accounts: Consider holding your dividend paying penny stocks in tax deferred accounts like 401(k) or IRA to delay taxation until withdrawal.
4. Wash Sale Rule: Be aware of the wash sale rule which prohibits you from claiming a loss on a security if you buy a “substantially identical” security within 30 days before or after the sale.
5. Tax Loss Harvesting: Consider tax loss harvesting which is selling securities at a loss to offset gains from other investments. This will help you minimize your tax liability and maximize your after tax returns.

Now that you understand the tax implications of dividend income from penny stocks you can make informed investment decisions and minimize your tax liability.

Dividend Paying Penny Stocks

• Pitney Bowes Inc. is a shipping and mailing company that provides technology, logistics and financial services and the stock price has gone up.
• Chesapeake Granite Wash Trust is a Delaware trust that owns royalty interests in oil and gas wells.
• Banco Santander S.A. is a global financial services company that provides retail and commercial banking products and services.
• Ambev S.A. is a beverage company that produces and distributes beer, soft drinks and other non-alcoholic beverages.

Historical Performance of Dividend Paying Penny Stocks

Historical performance is a key factor to consider when evaluating dividend paying penny stocks. Here are some stats:

1. Average Returns: According to the SEC, the average annual return for dividend paying stocks is 10% vs 7% for non-dividend paying stocks.
2. Volatility: Dividend paying penny stocks are less volatile than non-dividend paying stocks with lower standard deviation of returns.
3. Dividend Yield: The dividend yield of penny stocks can be all over the place, some stocks can offer yields as high as 10% or more.
4. Payout Ratio: The dividend payout ratio of penny stocks can also vary, some companies pay out a big chunk of their earnings as dividends.
5. Survivorship Bias: Be aware of survivorship bias which can skew historical performance data by only including companies that have survived and excluding those that have gone bankrupt or been delisted.

By looking at the historical performance of dividend paying penny stocks you can get an idea of their future growth and income potential.

Market Trends Affecting Dividend Paying Penny Stocks

Market trends can impact dividend paying penny stocks. Here are some trends to consider:

1. Interest Rates: Changes in interest rates can impact the attractiveness of dividend paying stocks, higher interest rates make bonds and other fixed income investments more attractive.
2. Economic Growth: Economic growth can impact dividend paying stocks, a strong economy means higher earnings and dividend growth.
3. Industry Trends: Industry trends can impact dividend paying stocks, companies in growing industries will perform better than those in declining industries.
4. Regulatory Changes: Regulatory changes can impact dividend paying stocks, changes in tax laws or regulations can impact the attractiveness of dividend paying stocks.
5. Market Sentiment: Market sentiment can impact dividend paying stocks, a bull market means higher stock prices and a bear market means lower stock prices.

By looking at the market trends affecting dividend paying penny stocks you can make informed investment decisions and adjust your portfolio.

How to Get Started with Penny Stock Investing

Penny stocks are super volatile and can go up 100% or more in minutes.

Dividend yields are rare in penny stocks and can also crash and drop the stock price.

An online broker can help you find the best penny stocks to trade and a portfolio manager.

Make sure to ask questions before signing up for an online broker, some may not offer $0 commission on unlisted stocks.

The author has no positions in any of the stocks mentioned in this article.

Case Studies of Dividend Paying Penny Stock Investments

Here are some case studies of dividend paying penny stock investments:

1. Pitney Bowes Inc.: Pitney Bowes Inc. is a shipping and mailing company that has been paying dividends since 2003. The dividend yield is 4% and the stock has gone up 50% in the last 5 years.
2. Chesapeake Granite Wash Trust: Chesapeake Granite Wash Trust is a Delaware trust formed by Chesapeake Energy Corporation. The trust pays 10% dividend and has increased dividend by 20% in the last year.
3. Banco Santander S.A.: Banco Santander S.A. is a global financial services company that has been paying dividends since 2002. The dividend yield is 5% and the stock has gone up 30% in the last 5 years.

Now you can see the characteristics of successful dividend penny stock investments and apply it to your own investments.