Best dividend paying penny stocks

Can an investor really trust dividend paying penny stocks? There is nothing wrong with penny stocks. In the US, penny stocks are those priced at under $1. If you apply a similar logic in the Indian context, any stock under Rs80 would technically qualify as penny stocks. We do not suggest going under Rs10 in India as it exposes investors to low quality stocks. One way to apply a filter is to focus on penny stocks with high dividends.

In this analysis, we shall also provide the dividend paying penny stocks list and help you focus and pick the best penny stocks with dividends. Choosing penny stocks is always tricky and dividends can come to your rescue in such times. Such dividends act as a hedge against market uncertainty and the inherent risk of penny stocks.

What are dividend-paying stocks?

Dividend stocks are companies that pay out regular dividends. Here the focus is on ton one-time or special dividends but on regular and consistent payout of dividends. Dividend stocks are normally well-established companies with a track record of distributing earnings back to shareholders and able to sustain a reasonable dividend yield to investors.

Normally, companies have a choice to either retain profits and reinvest in the business or payout as dividends. That decision depends on the ROE of the company. If the company can reinvest the profits within the same company at a much higher ROE, it is value accretive. Otherwise, it makes sense to payout generous dividends.

Buying dividend yield stocks can help investors generate income via dividends. For high dividend yield stocks, the dividend yield also acts as a base below with the price of the stock normally does not fall.

List of Best Dividend Stocks

For starters we shall not get into penny stocks, but just look at the best dividend yield stocks in the Indian context. The table below captures the same.

It is tough to set any clear cut-off for the dividend yield, but now that dividends are fully taxable in the hands of the investor, the dividend yield of over 6% can be seen as an attractive rate. While, historically, dividend yields have never made stocks very attractive, they have acted as a support level to stem the fall in the stock in tough market conditions. That is one of the big advantages of investing in dividend yield stocks.

Top Dividend-Paying Penny Stocks in India: Overview

Here is a quick overview of some of the top dividend paying penny stocks in India. We have taken a much broader definition of stocks having market price of less than Rs100, roughly equivalent to the global definition of stocks under $1.

Here is a quick overview of the above five dividend paying penny stocks.

Steel City Securities Limited

Steel City Securities is a retail stockbroker based out of the Southern city of Visakhapatnam and started out catering to the Vizag Steel Plant employees of RINL. Now it has a strong base across India and also has a strong trading and online digital business. The company also acts as a depository participant or DP.

The company has gradually expanded the value add component in its business model in the last few years and now offers broader capital market services, e-governance services and customized investment advisory services. It also offers the complete gamut of debt, equity and hybrid products for customers. It also has NBFC license.

TCFC Finance

TCFC Finance is a non-banking financial institution and was formerly called the Twentieth Century Finance Corporation. Apart from facilitating trading in equity shares, mutual funds and other assets, TCFC is also a proprietary investor and invests on its own account in equity, debt, mutual funds, and real estate

TCFC is a registered non-banking financial company and currently active trades in the equity segment in both the cash and futures markets. TCFC Finance is also an active participant in the initial public offerings or IPO market. The company has also invested in digitally enabled capital market services and offers customized advisory services.

Sutlej Jal Vidyut Nigam (SJVN)

It is one of the largest dedicated hydroelectric company in India. SJVN Limited is primarily engaged in the generation of electricity using the hydro route. In addition, the company also provides consulting services on hydropower generation by leveraging on its expertise. While SJVN is a public sector undertaking predominantly in the hydropower segment, it also has a franchise in thermal, wind, solar, power transmission and power trading.

SJVN currently operates power projects in the states of Himachal Pradesh, Uttarakhand, Bihar, Maharashtra, Uttar Pradesh, Punjab, Gujarat, and Arunachal Pradesh. In addition, SJVN also operates projects in neighbouring countries like Nepal and Bhutan.

Rail Vikas Nigam Ltd (RVNL)

Rail Vikas Nigam Limited (RVNL) is a purpose vehicle (SPV) that develops and implements capital projects on behalf of the Indian Railways. RVNL has the twin task of mobilizing financial resources and implementing projects related to the various plans and capex related to the Indian Railways. The stock has more than doubled in price in the last few months.

RVNL undertakes to complete all the railway projects; which includes the laying of new lines, doubling, gauge conversion from metre to broad, railway electrification, metro projects, workshops, major bridges etc. Most of the capital related works of the Indian Railways are undertaken through RVNL.

Gothi Plascon

Gothi Plascon was founded in the year 1994 to create value added products in the plastics industry. However, at that point, the company’s product offerings were ahead of the time and did not really take off. Eventually, the company moved to the real estate development business and has now turned from a loss making business to a profit making business.

Factors to Consider Before Investing in The High Dividend-Paying Penny Stocks

There are a number of factors to consider before you by dividend paying penny stocks.

• Focus on dividend paying companies that are not just high in one year but that have consistent dividend payout. That is a more sustainable scenario.
• Be wary of the quality of penny stocks since many of them can be inherently risky. Focus on penny stocks with a track record of consistent growth in sales and profits and stable to growing margins. Look at management quality and bandwidth.
• Dividends are taxed at the peak rates now in the hands of the investor. A 7% dividend yield is just about 4.9% in post-tax terms. In the past, the dividends were totally tax free in the hands of the investors.
• There is also a valuation angle to it. Historically, markets assign low valuation to companies that pay high dividends as they are seen to be not having growth prospects. What you gain on dividends, you can lose on valuations.

Conclusion

Dividend yield, accessible through a stock trading app, is a safe strategy to select stocks, and well-chosen dividend-paying penny stocks can add value in multiple ways. However, investors must be aware of the downside risks of any pure dividend yield strategy.

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